tag:blogger.com,1999:blog-75307763632229653132015-03-31T19:06:18.524+02:00Simon Thorpe's Ideas on the EconomyThis is a blog that I started in october 2010, mainly for discussing my ideas on the economy, taxation and politics. Please add comments - I'll do my best to reply. If you are new, I would recommend watching one of <a href="http://www.youtube.com/user/SimonJonathanThorpe">my YouTube presentations (in French or English)</a>. You can download a fully indexed pdf version (over 600 pages) <a href="http://bit.ly/1NzgKaf"> here</a>.Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.comBlogger483125tag:blogger.com,1999:blog-7530776363222965313.post-74045893262087826052015-03-29T23:42:00.000+02:002015-03-29T23:42:00.132+02:0019 economists call for QE for citizens in the Financial TimesI'm delighted to hear that I am not the only person who thinks that Mario Draghi could use&nbsp; €60 billion a month of money creation more intelligently. Back in January I wrote to him to propose that he should simply <a href="http://simonthorpesideas.blogspot.com.au/2015/01/another-open-letter-to-mario-draghi.html">give every man, woman and child in the Eurozone €186 a month as a sort of Unconditional Basic Income</a>. Far better than throwing the money at the financial sector and praying...<br /><br />Thanks in part to lobbying from <a href="http://www.positivemoney.org/2015/03/better-ways-boost-eurozone-economy-employment-ft/">Positive Money,</a> a group of 19 economists signed <a href="http://www.ft.com/intl/cms/s/0/7bc99348-d40b-11e4-99bd-00144feab7de.html?siteedition=intl#axzz3VoOsJHGN">a letter in the Financial Times on March the 26th</a> asking for exactly the same thing - except that they are only proposing €175. Great minds think alike ;-)<br /><br /><img alt="Screenshot 2015-03-27 12.40.00" class=" wp-post-image" height="300" src="http://2joz611prdme3eogq61h5p3gr08.wpengine.netdna-cdn.com/wp-content/uploads/2015/03/Screenshot-2015-03-27-12.40.00-650x300.png" width="650" /><br /><br /><br /><br />The letter is signed by the following 19 notable names. <strong>&nbsp;</strong><br /><br /><br /><strong>Victoria Chick</strong>, <em>University College London</em><br /> <strong>Frances Coppola</strong>, <em>Associate Editor, Piera</em><br /> <strong>Nigel Dodd</strong>,<em> London School of Economics</em><br /> <strong>Jean Gadrey</strong>,<em> University of Lille</em><br /> <strong>David Graeber</strong>, <em>London School of Economics</em><br /> <strong>Constantin Gurdgiev</strong>, <em>Trinity College Dublin</em><br /> <strong>Joseph Huber</strong>, <em>Martin Luther University of Halle-Wittenberg</em><br /> <strong>Steve Keen</strong>, <em>Kingston University</em><br /> <strong>Christian Marazzi</strong>, <em>University of Applied Sciences and Arts of Southern Switzerland </em><br /> <strong>Bill Mitchell</strong>, <em>University of Newcastle</em><br /> <strong>Ann Pettifor</strong>, <em>Prime Economics</em><br /> <strong>Helge Peukert</strong>,<em> University of Erfurt</em><br /> <strong>Lord Skidelsky</strong>,<em> Emeritus Professor, Warwick University</em><br /> <strong>Guy Standing</strong>, <em>School of Oriental and African Studies, University of London</em><br /> <strong>Kees Van Der Pijl</strong>, <em>University of Sussex</em><br /> <strong>Johann Walter</strong>, <em>Westfälische Hochschule, Gelsenkirchen Bocholt Recklinghausen, University of Applied Sciences</em><br /> <strong>John Weeks</strong>, <em>School of Oriental and African Studies, University of London</em><br /> <strong>Richard Werner</strong>, <em>University of Southampton</em><br /> <strong>Simon Wren-Lewis</strong>,<em>University of Oxford</em><br /><br /><span style="font-family: inherit;">Let me add my own.</span><br /><br /><strong>Simon Thorpe</strong>,<em> CerCo (Brain and Cognition Research Centre), Toulouse, France</em><br /><em><br /></em>If you want to join the list, just add a comment.<br /> <div data-track-pos="0"><br /></div>Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com1tag:blogger.com,1999:blog-7530776363222965313.post-17095497641262624992015-03-11T04:51:00.002+01:002015-03-11T04:51:27.045+01:00David Graeber's "Debt : The First 5,000 Years"I have finally found the time to read David Graeber's excellent and epic book on the history of Debt. You can download the book as <a href="http://libcom.org/files/__Debt__The_First_5_000_Years.pdf">a pdf file.</a><br /><br />One of the major points he makes is to demonstrate that the story that money was invented as a way to simplify barter - an idea present in the vast majority of textbooks on economy - is a total myth. For thousands of years, humans societies functioned using bookkeeping systems&nbsp; that kept a log of who owed what to whom. Money, in the sense that we currently use the term, only came into being with the appearance of the first coins in about 600 BC. There was a second period with very little money from around 600AD till about 1450AD, when banking in its current format appeared. During that period, nearly all business was done using systems based on various forms of IOUs, including tally sticks.<br /><br />I wonder what David Graeber would think of the sort of IOU based system that I have been proposing with <a href="http://www.owem.net/">OWE'M</a>. It seems to me that it may indeed be possible to come up with a new form of IOU based economy for the third millenium.&nbsp; Could it be that we are on the verge of a new form of civilisation, where the power of the money makers can be handed to individual citizens? Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com11tag:blogger.com,1999:blog-7530776363222965313.post-77985741753702402052015-03-09T04:20:00.000+01:002015-03-11T05:12:22.204+01:00Saving the world - by fixing the economic system - the full pdfNow that my blog has had over 167,000 visits, it's possible that some of you might like to have the entire contents of my blog as a fully clickable pdf file. Thanks to <a href="http://www.blogbooker.com/">BlogBooker</a>, I have been able to generate a Word file document that have edited to remove (a large number of) typos, and generally clean up. Using Word for Windows (but not Word for Mac :-( ), you can generate a pdf file with all the different posts indexed.<br /><br />You can download the result <a href="http://bit.ly/1NzgKaf">here</a>, and since I have used Bit.ly to shorten the Dropbox link, I will even be able to find out how many people have downloaded it, and (roughly) where you live - well, which country you live in.<br /><br />But be warned. My blog now runs to over 300,000 words. It takes up over 600 pages of single spaced A4 text, using a font size of 10 (!). And it will use up 31 Mbytes of disk space! Even I'm impressed, and I wrote it all!<br /><br />One nice thing that I noted when reading rapidly through the whole thing is that there is hardly a word that I would now reject - even though my ideas have evolved enormously over the 4 and a half years that have elapsed since I started this blog in October 2010. Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com0tag:blogger.com,1999:blog-7530776363222965313.post-83596880009461032912015-02-28T21:07:00.002+01:002015-02-28T21:07:38.919+01:00Fixing the Economic System - a new Youtube presentationLast Tuesday, I gave a lunchtime seminar at the prestigious Toulouse School of Economics.&nbsp; I'd already invited myself to give a talk there back in March 2012, but on that occasion only four people turned up to hear me present my ideas on replacing the current tax system by a Flat Rate Universal Financial Transaction Tax.<br /><br />This time, the turn out was much better, and there were about 20 people present. This was the title and abstract for my talk:<br /><br /><i><b>“Can a cognitive neuroscientist and amateur economist say anything of interest to real economists?”</b></i><br /><i><br />Since the summer of 2010, I have become increasingly interested (some would say obsessed) with the economy. I have devoted thousands of hours to reading up on the subject, I’ve posted 480 pieces on my blog, which has had over 165,000 visits, produced 24 Youtube videos, given a TEDx talk on Tax reform, set up an association called “Monnaie Honnête” which is a member of the International Movement for Monetary Reform, and created an online exchange system called “OWE’M’ that allows credit creation by Citizens using an IOU based system. But, so far, I have had very little opportunity to get feedback from real economists. This talk could be the chance for the economists to prove to me that I have been talking garbage. Alternatively, there might be some useful ideas in there somewhere…. who knows? As a firm believer in the power of biological evolution, my personal belief is that the best strategy is to generate lots of variations, and let natural selection do the rest. I would claim that I have been generating lots of options, and that some of those ideas may be of interest.</i> <br /><br /><br />You may well be wondering how things went. Well, not badly, I think. I was prettty pleased with what I had prepared. Indeed I had put a lot of effort into getting my key ideas into the talk, since I realized that it was fairly unlikely that I would get another chance in the near future.<br /><br />I've now had time to generate a Youtube presentation of the same talk and so you will be able to find out what I said - if you have 60 minutes to spare.<br /><br />Here's a link to the <a href="https://www.youtube.com/watch?v=NQIducYlrjA">Youtube site</a><br /><br /><div class="separator" style="clear: both; text-align: center;"><iframe width="320" height="266" class="YOUTUBE-iframe-video" data-thumbnail-src="https://i.ytimg.com/vi/NQIducYlrjA/0.jpg" src="http://www.youtube.com/embed/NQIducYlrjA?feature=player_embedded" frameborder="0" allowfullscreen></iframe></div><br />As you can see, I decided not to use the same title as I used at the Toulouse School of Economics seminar - I called it simply "Fixing the Economic System", although in fact the content is just about identical.&nbsp; Do feel free to make comments, either here, or on the Youtube site. Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com0tag:blogger.com,1999:blog-7530776363222965313.post-29991640120411816772015-02-21T11:30:00.002+01:002015-02-21T18:43:15.503+01:00US taxpayers have now paid $9.6 trillion in interest payments on Government debt since 1988Back in June 2012, I had a post showing that US taxpayers had paid<a href="http://simonthorpesideas.blogspot.com/2012/06/us-interest-payments-since-1988-85.html"> $8.5 trillion in interest payments on goverenment debt since 1988</a>.<br /><br />I thought it might be amusing to update the figures, using the official US Treasury information that you can find <a href="http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm">here</a>. I've included the numbers on the US public sector debt too - you can easily download the official numbers for <a href="http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo4.htm">years before 2000</a>, for <a href="http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo5.htm">2000-2014</a>, and for the <a href="http://www.treasurydirect.gov/govt/reports/pd/pd_debttothepenny.htm">latest figures to the nearest cent.</a><br /><br />Here are the results.<br /><br /><div class="separator" style="clear: both; text-align: center;"><a href="http://4.bp.blogspot.com/-JeyKxR3rvLM/VOhXFkf3VAI/AAAAAAAAB_8/SrALxXpfW2Q/s1600/USInterestPayments2015.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="http://4.bp.blogspot.com/-JeyKxR3rvLM/VOhXFkf3VAI/AAAAAAAAB_8/SrALxXpfW2Q/s1600/USInterestPayments2015.png" height="568" width="640" /></a></div>&nbsp;As you can see, government debt has continued to soar, and has reached&nbsp; $18.1 trillion at the end of january 2015. But the remarkable fact is that $9.6 trillion of that (roughly 53%) is entirely due to the interest payments on that debt since 1988 - the US treasury site doesn't provide number before then.<br /><br />In fiscal year 2014, the total interest payments totalled $431 billion - a number that is second only to the peak value of $454 billion achieved in 2011.<br /><br />I've also calculated the effective interest rate. That number has effectively been dropping virtually continuously since a peak of 8.43% in 1989, and now stands at 2.42%.<br /><br />Does that mean that US taxpayers are getting a good deal?<br /><br />NO WAY! Yes, the markets are charging a lower rate than before, but they don't have to charge much when the Debt level is so high. $430 trillion is still 2.43% of the US GDP for 2014 (it was <a href="http://www.bea.gov/iTable/iTable.cfm?ReqID=9&amp;step=1#reqid=9&amp;step=3&amp;isuri=1&amp;903=5">$17.7 trillion</a>). That fits with the general rule of thumb that Banks will typically adjust their interest rates to try and suck money out of taxpayers' pockets at an<a href="http://simonthorpesideas.blogspot.com/2013/04/the-uk-banking-model-for-siphoning-off.html"> optimal rate of not more than about 3% of GDP</a>. If they tried siphoning off more money, taxpayers might notice what was going on.<br /><br />And remember that Banks can lend the US government non-existant money and still charge interest. It's a truly amazing arrangement that is a fantastic deal - for the Banks who have the monopoly on money creation.<br /><br />As I have pointed out, since the US government's credit rating is AAA (<a href="http://www.reuters.com/article/2014/09/19/fitch-affirms-united-states-at-aaa-outlo-idUSFit75668020140919">according to the rating agency Fitch</a>), the <a href="http://simonthorpesideas.blogspot.com/2014/03/the-biggest-bank-scam-of-them-all-banks.html">Basel Banking regulations mean that such loans have a 0% risk weighting</a>.&nbsp; And that means that Banks don't even have to have any capital at all to make loans. They can create infinite quantities of "money" to lend to the US government, who will then happily pay out $430 billion in interest using tax payers money.<br /><br />Remember, that there is no reason why the US government could not create the nation's money supply itself.&nbsp; <br /><br />If anyone can explain why this insane system is allowed to continue, do let me know. Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com0tag:blogger.com,1999:blog-7530776363222965313.post-32337596177648750682015-02-15T17:31:00.000+01:002015-02-15T23:04:14.620+01:00Global Debt is now 2.5 times the total Money Supply - the system is clearly unworkableIn april 2013, I published a post in which I compared the total amount of debt in the world economy with the total money supply. That post, called <a href="http://simonthorpesideas.blogspot.fr/2013/04/total-global-debt-and-money-supply.html">"Total Global Debt and Money Supply : Twice as much debt as there is money"</a> is by far my most popular post, and has been visited well over 6000 times. The numbers I provided gave serious cause for concern, because I calculated that while there was $137 trillion in debt, there was only $68 trillion of money. So, even if you took every single cent there was in existence, you would never be able to pay off all the debt.<br /><br />Following the two recent reports showing that, since the financial crisis in 2007-8, debt levels had soared even more, I thought it would be interesting to recalculate the total about of money relative to debt. Earlier today, I published <a href="http://simonthorpesideas.blogspot.fr/2015/02/soaring-global-debt-levels-time-for.html">a post on the remarkly detailed report from the McKinsey Global Institute</a> that showed that Global debt has now reached a staggering $199 trillion. <br /><br />What about the Global Money supply? To find out, I have extracted all the numbers provided by a remarkable website called <a href="http://www.tradingeconomics.com/">Trading Economics</a>. There you can find tables with Money supply figures corresponding to <a href="http://www.tradingeconomics.com/country-list/money-supply-m0">M0</a>, <a href="http://www.tradingeconomics.com/country-list/money-supply-m1">M1</a>, <a href="http://www.tradingeconomics.com/country-list/money-supply-m2">M2</a> and <a href="http://www.tradingeconomics.com/country-list/money-supply-m3">M3&nbsp; </a>for most countries. Unfortunately, the tables are not complete because quite a few countries don't report M3. For example, the Federal Reserve in the US decided not to bother reporting M3 in 2006. But I simply took the largest value for each country, and multiplied the number by the current US dollar exchange rate to calculate each country's money supply in dollars.<br /><br />The complete dataset is shown in the following table.<br /><div class="separator" style="clear: both; text-align: center;"><a href="http://1.bp.blogspot.com/-hRG7WCZpokQ/VODGnCDtqtI/AAAAAAAAB_s/_KIhIchwAdU/s1600/MoneySupply2015.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://1.bp.blogspot.com/-hRG7WCZpokQ/VODGnCDtqtI/AAAAAAAAB_s/_KIhIchwAdU/s1600/MoneySupply2015.png" height="640" width="539" /></a></div><br />Compared with the numbers that I gave back in 2013, there have been a number of marked changes. For example, the Chinese money supply has soared from $15.7 trillion to $20.2 trillion. The other big players, namely the Eurozone Area, the USA and Japan have stayed fairly stable, but the UK's money supply has increased from $3.19 trillion to over $3.6 trillion.<br /><br />But the bottom line is that the total money supply for the entire planet now stands at about $78.8 trillion, up from the previous number that I quoted back in april 2013 ($68.3 trillion). The problem is that while this has increased, that increase is completely swamped by the increase in debt.<br /><br />We are now in the situation where we collectively have $199 trillion of debt, and only $78.8 trillion to pay it off. There is therefore 2.5 times more debt than money!<br /><br />You surely don't need to be a rocket scientist to see that this situation is completely untenable. Anyone telling us that we can get out of this debt trap by simply being frugal and paying our taxes like good citizens clearly hasn't got a clue.<br /><br />How on earth did we get into this situation?<br /><br />For me, the answer is pretty simple. Commercial banks create money when then make loans to individuals, businesses and governments. But when they do this, they create enough money to make the loan, but don't create the money that will be needed to pay the interest. Thus, if a bank creates $1 trillion in loans with interest at 2% and waits for 20 years, the total amount of debt&nbsp; in the system will have increased to nearly $1.5 trillion. This is what has been happening for centuries, but the effects of that compound interest have now become totally out of control.<br /><br />It is clearly time for us to change the system. All money should be created interest free. Full stop.Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com5tag:blogger.com,1999:blog-7530776363222965313.post-83633978789421029562015-02-15T11:19:00.001+01:002015-02-15T11:19:49.914+01:00Soaring Global Debt Levels - time for a complete rethink of the systemMy thanks to the McKinsey Global Institute for a truly remarkable 123-page report called <a href="http://www.mckinsey.com/insights/economic_studies/debt_and_not_much_deleveraging">"Debt and (not much) Deleveraging"</a> that came out on the 5th of Febuary. It hammers home a point that was made last year in another report called <a href="http://www.voxeu.org/sites/default/files/image/FromMay2014/Geneva16.pdf">"Deleveraging? What Deleveraging?"</a> that I mentioned <a href="http://simonthorpesideas.blogspot.fr/2015/01/deleveraging-what-deleveraging-we-need.html">last month</a>. Both reports demonstrate clearly that there is not even a glimmer of light at the end of the tunnel. Debt is going through the roof. When are economists going to admit that the current is unworkable?<br /><br />The McKinsey Institute is stuffed full of detailed information showing how the debt crisis is just getting worse and worse. Here are some of the most striking findings.<br /><br />First, here is a graph showing how total global debt has now soared to $199 trillion, up $57 trillion from 2007, and has now reached 286% of GDP. <br /><div class="separator" style="clear: both; text-align: center;"><a href="http://1.bp.blogspot.com/--DeedmO-iIs/VOBh1d-FMoI/AAAAAAAAB-o/b0Xj6s0A4Vo/s1600/GlobalDebt.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="http://1.bp.blogspot.com/--DeedmO-iIs/VOBh1d-FMoI/AAAAAAAAB-o/b0Xj6s0A4Vo/s1600/GlobalDebt.png" height="514" width="640" /></a></div><br />Clearly, I'm going to have to update my claim in April 2013 that <a href="http://simonthorpesideas.blogspot.fr/2013/04/total-global-debt-and-money-supply.html">global debt is about twice the total money supply</a>. That calculation was based on a value for total debt of $138 trillion. The debt levels are actually nearly 50% higher than that, meaning that it is even more impossible to pay off the debt than I had thought.<br /><br />The next graph shows that the total debt to GDP ratio has increased almost everywhere since 2007, with some countries like Ireland showing an incredible increase of over 170%. <br /><div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: center;"><a href="http://4.bp.blogspot.com/-c4v_FkNUCDQ/VOBtqg2fWVI/AAAAAAAAB-4/nprwNam1BGY/s1600/DebtGDPRatios.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://4.bp.blogspot.com/-c4v_FkNUCDQ/VOBtqg2fWVI/AAAAAAAAB-4/nprwNam1BGY/s1600/DebtGDPRatios.png" height="640" width="457" /></a></div>Then we have a detailed breakdown of where the debt is located, with separate numbers for Government, Corporate, Household and Financial Sector debt. The countries are ranked in terms of overall Debt-to-GDP ratio.<br /><div class="separator" style="clear: both; text-align: center;"></div><br /><div class="separator" style="clear: both; text-align: center;"><a href="http://1.bp.blogspot.com/-vPYcwSLU5qU/VOBut85a6lI/AAAAAAAAB_M/FSe9fAW49lw/s1600/DebtGDPRatiosBreakdown.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://1.bp.blogspot.com/-vPYcwSLU5qU/VOBut85a6lI/AAAAAAAAB_M/FSe9fAW49lw/s1600/DebtGDPRatiosBreakdown.png" height="640" width="462" /></a></div><br />This makes particularly sobering reading,&nbsp; but is full of interesting information. <br />There's another graph showing that, overall, it is governments that have been picking up the tab.<br /><div class="separator" style="clear: both; text-align: center;"><a href="http://2.bp.blogspot.com/-M2-BuF0W2_U/VOBviSxs10I/AAAAAAAAB_U/NyUWVHk8vIA/s1600/DebtbySector.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://2.bp.blogspot.com/-M2-BuF0W2_U/VOBviSxs10I/AAAAAAAAB_U/NyUWVHk8vIA/s1600/DebtbySector.png" height="385" width="400" /></a></div><br />In contrast, you can see from the following graph that the Financial sector has been getting its debt levels down substantially - especially in the USA. Good for them, I suppose.<br /><div class="separator" style="clear: both; text-align: center;"><a href="http://2.bp.blogspot.com/-zMlCOwt1vGo/VOBwGwQwWZI/AAAAAAAAB_c/lHf_gLawKF0/s1600/FinancialSectorDebt.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://2.bp.blogspot.com/-zMlCOwt1vGo/VOBwGwQwWZI/AAAAAAAAB_c/lHf_gLawKF0/s1600/FinancialSectorDebt.png" height="290" width="400" /></a></div><br />What can we conclude from this? Well, it looks to me that there is absolutely no reason to believe that things have improved since the crisis. Those responsible for the crisis - namely the banks, have been getting out of the hole that they created. But the overall picture is worse than ever. And above all, it is our governments who have been taken on debt. And that means that taxpayers like you and me are even worse off that ever.<br /><br />Doesn't all this mean that what we really need is a complete change in the model? We have to completely rethink the way money works. We need a money system that isn't built on debt. <br /><br />Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com0tag:blogger.com,1999:blog-7530776363222965313.post-77001455057767350402015-01-26T06:30:00.002+01:002015-01-26T10:27:31.480+01:00A plan for Greece - and the rest of us!The Greek people have just <a href="http://www.theguardian.com/world/2015/jan/25/syriza-historic-win-greece-european-union-austerity">voted overwhelmingly to reject austerity</a>. They handed power to Alexis Tsipras, the charismatic 40-year-old former communist who leads the umbrella coalition of assorted leftists known as Syriza. They now have hope. <br /><br />What they now need is some clear solutions to their problems. I'm not sure that Tsipras has all the answers. So, here are my suggestions.<br /><br />1) Set up a Greek Citizens' Bank. The bank would get its capital from Greek citizens who would inject enough capital into the bank to get it off the ground and allow it to meet international banking regulations such as the Basel III regulations. Citizens would have to realize that they would not get their money back, but I believe that they would see why it would be in their interest.<br /><br />2) Offer special Greek Government Citizens bonds that pay 0% interest and have the longest duration permissible under standard banking regulations. This is at least 10 years, but could perhaps be extended to 20, 50, 100 or even a 1000 years.<br /><br />3) Everytime the new Greek government needs to pay the "investors" who had bought the conventional Greek government bonds, it would emit the equivalent value in Citizens bonds that would be bought by the Greek Citizens' Bank. There would be no effective limit to the amount of "money" that could be generated in this way, but since the money would only be used to pay off debt, it could not be accused of being inflationary.<br /><br />4) When the Bond markets ask for their money back with interest, they should only be paid interest at the rate paid by the Germans - not the extortionate usury rates that Greece was forced to pay at the height of the crisis. As <a href="http://sdw.ecb.europa.eu/browseChart.do?type=series&amp;node=SEARCHRESULTS&amp;q=IRS.M.BE.L.L40.CI.0000.EUR.N.Z%20IRS.M.DE.L.L40.CI.0000.EUR.N.Z%20IRS.M.IE.L.L40.CI.0000.EUR.N.Z%20IRS.M.GR.L.L40.CI.0000.EUR.N.Z%20IRS.M.ES.L.L40.CI.0000.EUR.N.Z%20IRS.M.FR.L.L40.CI.0000.EUR.N.Z%20IRS.M.IT.L.L40.CI.0000.EUR.N.Z%20IRS.M.CY.L.L40.CI.0000.EUR.N.Z%20IRS.M.LV.L.L40.CI.0000.EUR.N.Z%20IRS.M.LU.L.L40.CI.0000.EUR.N.Z%20IRS.M.MT.L.L40.CI.0000.EUR.N.Z%20IRS.M.NL.L.L40.CI.0000.EUR.N.Z%20IRS.M.AT.L.L40.CI.0000.EUR.N.Z%20IRS.M.PT.L.L40.CI.0000.EUR.N.Z%20IRS.M.SI.L.L40.CI.0000.EUR.N.Z%20IRS.M.SK.L.L40.CI.0000.EUR.N.Z%20IRS.M.FI.L.L40.CI.0000.EUR.N.Z&amp;SERIES_KEY=229.IRS.M.DE.L.L40.CI.0000.EUR.N.Z&amp;SERIES_KEY=229.IRS.M.GR.L.L40.CI.0000.EUR.N.Z">the graph below from the ECB </a>shows, Greece was paying roughly the same rates as Germany from its entry to the Euro in 2001 until 2008, but then ended up paying 29.24% to Germany's 1.85% in Feburary 2012 - that's 15.8 times more.&nbsp; For me, those excessive interest payments are totally unjustifiable. It is now clear that this totally unjust difference was entirely due to the failure of the ECB and the European Union to treat the Greek people fairly. Indeed, those extortionate interest rates account for much of the increase in Greek Public Sector debt which, thanks to Troika imposed austerity, soared from <a href="http://www.tradingeconomics.com/greece/government-debt-to-gdp">105% of GDP in 2008, to 175% of GDP today.</a><br /><div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: center;"><a href="http://2.bp.blogspot.com/-sQNbpSCwF5o/VMYBZ0fnqCI/AAAAAAAAB-E/KPC9w2Jw9d8/s1600/GreeceGermanyRates.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="http://2.bp.blogspot.com/-sQNbpSCwF5o/VMYBZ0fnqCI/AAAAAAAAB-E/KPC9w2Jw9d8/s1600/GreeceGermanyRates.png" height="590" width="640" /></a></div><br />5) The Greek people should insist that instead of pumping €60 billion a month into the financial markets for the forseeable future, Mario Draghi and the ECB should simply provide the same amount of money directly to the 330 Million Eurozone citizens in the form of an Unconditional Basic Income. This would mean 182€ for every man, woman and child in the Eurozone, an amount that for a family of four would be nearly 25% more than <a href="http://www.fedee.com/pay-job-evaluation/minimum-wage-rates/">the current minimum wage in Greece (€585.78)</a>.<br /><br />6) Greece should insist that the ECB introduces a universal transaction tax on all Euro-denominated financial transactions - wherever they occur in the world. The revenue generated by the tax should be divided between the 17 Eurozone countries according to population size. Half the money should be given to each country's government, and the other half provided directly to Citizens in the form of an Unconditional Basic Income.&nbsp; Given that much of the trading in places like the City of London are in Euros, this would provide substantial sums. As an example, <a href="http://simonthorpesideas.blogspot.fr/2015/01/my-hope-for-2015-lets-start-taxing-all.html">London-based LCH.Clearnet processed €238,447,455,975,386 in Euro-denominated products in 2014</a>. A tax of 0.1% on that could generate up to €200 billion in revenue - and that is just one of the players.<br /><br />7) The Greek government should create accounts in N-Euros for each Greek citizen. These electronic accounts, which cannot go negative, could be used to pay taxes and other payments. Citizens could choose to receive a variable percentage of any salaries or benefits in N-Euros rather than standard Euros. This would allow the government to pay its workers and provide social security payments, without the need to borrow "money" from the financial markets and from the ECB and IMF. For more information about the N-Euro solution, see my previous posts from <a href="http://simonthorpesideas.blogspot.fr/2012/09/eureka-replace-euro-with-n-euro.html">September 2012</a> and <a href="http://simonthorpesideas.blogspot.fr/2012/10/more-on-n-euro-idea.html">October 2012</a> as well as <a href="https://www.youtube.com/watch?v=JJvkvjr6z0U">my Youtube presentation</a> on the subject.<br /><br />8) In parallel, the Greek government should set up a Citizens' Credit system, along the lines of the <a href="http://www.owem.net/">OWE'M system</a> that I set up last year using the publicly available <a href="http://www.cyclos.org/">Cyclos 4 banking system</a>. It's a system that needs no actual money at all to run. Users can simply pay for goods and services by sending the equivalent of an IOU in Euros. If the person providing the goods and services is prepared trust the other person, then the entire economy can potentially operate without the need for any Bank generated money at all. Conventional Euros would just be the measuring stick.<br /><br />And, once those demands have been met, we will be able to apply the same principles to all the countries in the Eurozone and beyond.<br /><br />Hey, 2015 might turn out to be a good year after all! Thank you Greece!Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com0tag:blogger.com,1999:blog-7530776363222965313.post-81650105955692468852015-01-24T17:26:00.000+01:002015-01-24T19:06:15.785+01:00Another Open Letter to Mario Draghi, president of the European Central BankDear Sir,<br /><br />Last thursday, you announced that <a href="https://www.ecb.europa.eu/press/pressconf/2015/html/is150122.en.html">the ECB will create €1.1 trillion and use the money to try and breath some life into the moribund Eurozone economy</a>.<br /><br />It's clear that being the president of the ECB gives you phenomenal power - power that you had already used back in December 2011 and Februay 2012 when <a href="http://simonthorpesideas.blogspot.fr/2012/02/mario-draghi-prints-another-529-billion.html">you also created over €1 trillion that you provided to the Banking sector</a> in the hope that it would have a positive effect. I presume that, given the current situation, we can all agree that your previous injection of €1 trillion didn't really fix the problem.<br /><br />I have many questions for you.<br /><br />The most important one asks whether your proposal is really the best way to use €1.1 trillion of money creation.<br /><br />The Eurozone has 330 million inhabitants. That means that you could have used the same amount of ECB money to put 3300€ into the pockets of every man, woman and child in the Eurozone.&nbsp; That's 15,200 euros for a family of four. Just imagine how much stimulus to the Eurozone's economy would be provided by giving households a direct cash injection of that amount! And the amount of debt reduction that you could have allowed.<br /><br />I imagine that you will say that putting that much money in peoples' pockets would produce Zimbabwe style hyperinflation, although as I presume you know perfectly well, when people pay off their debts to banks, the "money" just disappears. It could not cause inflation, and will have the effect of reducing the amount of assets held by the banks. That is good news for everyone - including the Banks.<br /><br />But lets assume that you are being told what to do by the Germans who remain obsessed with the need to avoid a repeat of the Weimer republic. And it's true that pumping €1 trillion in one step could be a bit risky.<br /><br />So, why not do it gradually. You have specifically said that you will be injecting €60 billion every month until at least September 2016. Divided by 330 million, that is 182€ per person per month - 728€ for a family of four. That is significantly more that the current minimum wage in several Eurozone countries, as you can see from the following table that I compiled using <a href="http://www.fedee.com/pay-job-evaluation/minimum-wage-rates/">publicly available data</a>.<br /><div class="separator" style="clear: both; text-align: center;"><a href="http://1.bp.blogspot.com/-CYzdT3cwNHQ/VMN7CwA49lI/AAAAAAAAB9k/Y_pL2MScqjo/s1600/EurozoneMinimumWages.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://1.bp.blogspot.com/-CYzdT3cwNHQ/VMN7CwA49lI/AAAAAAAAB9k/Y_pL2MScqjo/s1600/EurozoneMinimumWages.png" height="400" width="290" /></a></div>Just imagine. With the same amount of money that you are propopsing to create every month, you could provide a guaranteed basic income for a family of four that was above the wages paid in austerity-crippled counties like Greece, Portugal and Spain. <br /><br />Are you still sure that your way is the best way to use all that money?? Where are the arguments showing that your method would be better than directly putting money in peoples' pockets? <br /><br />OK. So you don't like the idea of giving citizens money directly. So let's look in more detail at what you propose to do.<br /><br />At least some of the €60 billion you will be pumping into the economy is supposed to be used to buy up bonds on the secondary market. I suppose that is not completely useless. It would mean that you should be able to stop interest rates on public sector debt going through the roof like they did<a href="http://simonthorpesideas.blogspot.fr/2012/02/greek-tragedy-interest-rates-at-2591.html"> in January 2012 when the Greek government ended up having to pay 25.91%</a>. They would have done as well paying for everything with a credit card.<br /><br />But the fact is that the real problem is that Eurozone governments are all massively in debt. <a href="http://simonthorpesideas.blogspot.fr/2014/04/european-government-debt-and-interest.html">At the&nbsp; end of 2013, public sector debt in the Eurozone was over €9 trillion</a>. And the interest payments on that debt totalled €278 billion - a massive drain on public resources because these interest payments have to be paid with tax-payers money. Indeed, if you add up those interest payments for the 18 years from 1995 to 2013, the total reaches a colossal €5.16 trillion - over 57% of all public sector debt.<br /><br />From this, it follows that allowing governments to pay less interest on public sector debt would indeed be a good thing. But, if I understand correctly, your proposal to pump €60 billion of newly minted ECB money into the financial markets isn't restricted to buying up bonds. I believe that you have set things up so that you can buy just about anything that the financial sector wants to get rid of. A bank that had a whole pile of not very good assets, could potentially swap them for some real ECB money. Does that make sense? <br /><br />Who gets to decide what to spend the €60 billion on? And with what criteria?<br /><br />Personally, I would recommend the following simple and clear proposition. The €60 billion should ONLY be used for buying bonds of the different Eurozone countries. We don't want your money going to buy up any old rubbish - however much the Banks would like to get rid of it.<br /><br />Secondly, I propose that you should buy up bonds for each country simply on the basis of population size. Germany&nbsp; has roughly 25% of the population of the Eurozone. So 25% of the €60 billion should be used for buying German bonds, 19.6% for French bonds and so on. This was a suggestion that I originally made in a Youtube video calle <a href="https://www.youtube.com/watch?v=P1gcd8CYEEU">"How Eurozone countries could fix the global economic crisis"</a> published in August 2012, and which has been seen by over 600 people.<br /><br />Anything else would mean that you would be able to use the bond buying process to put pressure on governments to implement austerity - either they comply with your directives, or you don't buy their bonds. I suspect that many Eurozone citizens are prepared to put up with more intereference from the Troika in their governments' decisions. No doubt we will see just how strong this resentment is when the Greeks vote this weekend.Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com4tag:blogger.com,1999:blog-7530776363222965313.post-89899357738333474972015-01-19T07:32:00.003+01:002015-01-19T09:55:40.124+01:00UK Green Party goes for an Unconditional Basic Income!Now, here is some good news.<br /><br />On the BBC's Andrew Marr program yesterday morning, the leader of the UK Green Party, Nathalie Bennett, announced that t<a href="http://www.theguardian.com/politics/2015/jan/18/green-party-citizens-income-natalie-bennett-benefit">he party would include the introduction of an Unconditional Citizen's Income in its manifesto</a>. Well done! You can see the interview on Youtube <a href="https://www.youtube.com/watch?v=f7EnaZPlqDA">here</a>, and the interesting bit starts after 4:30m.<br /><br />The party is also famous for including <a href="http://simonthorpesideas.blogspot.fr/2013/09/uk-green-party-signs-up-for-monetary.html">reform of the money creation process in its program,</a> using ideas very similar to the ones proposed by Positive Money.<br /><br />I understand that the proposals for a Basic Income are similar to those proposed by organisations like the <a href="http://www.citizensincome.org/">Citizen's Income Trust</a> and <a href="http://basicincome.org.uk/about-us/">Basic Income UK</a>. According to an <a href="http://www.theguardian.com/society/2014/apr/08/citizens-income-instead-of-benefits">earlier report in the Guardian</a> , both organisations argue "<i>that the scheme would actually cost less than our means-tested benefits system. It would be paid for by the withdrawal of income-contingent benefits and lowering the threshold at which people people in work start to pay income tax. Some supporters also call for a land value tax. This would mean every citizen could benefit from a basic income of £7,000 (more for pensioners, and those with severe disabilities)."</i><br /><br />And in <a href="http://www.newstatesman.com/politics/2014/08/citizens-income-71-week-person-would-make-britain-fairer">an article in the New Statesman last summer</a>, which talked about the Citizen's Income Trust, suggested that the&nbsp; <i>"annual spend on benefits should be distributed equally among all citizens, regardless of their income or employment status. Under their proposals, 0-24 year olds would receive £56.25 per week, 25-64 year olds would receive £71 per week and those 65 and over would receive £142.70 per week. </i><br /><br /><i>Analysing figures from the 2012-13 financial year, the cost of such a scheme is projected at around £276bn per year – just £1bn more than the annual welfare budget that year –making the implementation of a citizen’s income close to revenue and cost neutral.</i><br /><i></i><i>Disability and housing benefits would remain intact, but the scheme would replace all other benefits including child benefits, income support and jobseeker’s allowance, national insurance and state pensions. Included in the current annual spend figures is £8bn in Department of Work and Pensions (DWP) administration and £2bn in HMRC tax credit administration and write-offs."</i><br /><br />There had been earlier reports that the UK's Green Party were thinking about this. For instance, <a href="http://www.buzzfeed.com/jonstone/greens-to-lead-on-universal-basic-income">a report on buzzfeed said</a> that <i>"the exact level of the income has not been set, pending manifesto costing, but a Green party source said it would likely be higher than existing social security payments. Jobseeker’s Allowance is currently £72.40 a week for adults, or £3,765 a year."</i><br /><br />This&nbsp; is all very encouraging. I just wish that the Green Parties in France could be so inspired.<i><br /></i>Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com0tag:blogger.com,1999:blog-7530776363222965313.post-13563077003647181382015-01-11T14:38:00.001+01:002015-01-11T14:38:31.156+01:00Charlie Hebdo - What now?It is one thing to say that we want to defend <a href="http://simonthorpesideas.blogspot.fr/2015/01/liberte-egalite-fraternite.html">the 17 principles of the Declaration of the Rights of Man</a>, principles that can be summarized in the three basic ideas of Liberty, Equality and Fraternity. But we have a real problem. <a href="http://www.cnn.com/2014/10/02/world/europe/france-jihadis-isis-syria-iraq/">Hundreds, even thousands, of young French men and women have been convinced that they should join the Jihadist terrorists</a> - that they should devote their lives to destroying the model of society that lies at the heart of the western society.<br /><br />What can we do?<br /><br />While I will never defend the outrageous and inhuman behavior that led to the carnage this week in Paris, I have to admit that there is a problem. The principles of justice and equality that are at the heart of the French Nation, and which, in principle, we in the west should all share, are so clearly so far from the reality in which we all live, it is no wonder that a few Islamists can find perfectly good arguments that prove that western society is not the model that we should be aiming for.<br /><br />When <a href="http://www.forbes.com/sites/laurashin/2014/01/23/the-85-richest-people-in-the-world-have-as-much-wealth-as-the-3-5-billion-poorest/">85 individuals have the same wealth as half the population of the planet</a>, is it surprising that you can convince people that our society is fundamentally unjust?<br /><br />When <a href="http://daviddegraw.org/peak-inequality-the-01-and-the-impoverishment-of-society/">0.01% of the US population has the wealth of the bottom 2/3 of American society</a>, can we honestly say that we have got it right?&nbsp; <br /><br />When our entire monetary system is based on the principle <a href="http://simonthorpesideas.blogspot.fr/2014/03/victory-bank-of-england-admits-that.html">that Bankers are allowed to lend money that they do not have</a>, and charge us interest to rent us&nbsp; their money, can it be surprising that Islamic models that regard usuary as a heinous sin could be attractive to disenfranchised youth?<br /><br />When the simple fact of <a href="http://www.defrancisation.com/france-taux-de-chomage-selon-la-nationalite/">being born a Muslim of immigrant parents means that your chances of getting a job and being able to play a useful role in society are slashed</a>, can we really be surprised that so many such people are attracted by the Jihadist extremists?<br /><br />So, what do we do?&nbsp; How can we reduce the attraction of jihadist extremism? <br /><br />Do we answer the problem by increasing the number of police so that there are 25-30 people working full-time to control the activity of every potential terrrorist? With thousands of people in France that already need to be monitored, we could end up with half the population forced to devote their lives to preventing the desparate members of our society resorting to terror to get their own back?<br /><br />I say no. The only real solution is to&nbsp; change our society. We need to change things to show that our model is the best one there is. That we have the solutions. To put it mildly, there is clearly some room for improvement....<br /><br />I believe that if there is one thing that would change things more than anything else, it is the introduction of an Unconditional Basic Income for all. Yes, if every man, woman and child had, by right, enough to live decently, then many of the recriminations that can justifiably be projected at our society, would collapse.<br /><br />As I have argued elsewhere, a tiny sum paid to people in third world countries in Africa and elsewhere could transform our world.&nbsp; <br /><br />For a fraction of the cost required to set up the police state that would be required to maintain law and order, we could have a fair and just society. A society that would implement the basic principles that were already there in 1789. Principles that were taken even further when Thomas Paine proposed the idea of a Citizen's Income in his document <a href="https://www.socialsecurity.gov/history/paine4.html">"Agrarian Justice" in 1795-6</a>. <br /><br />Isn't it time for people to take this idea seriously? Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com2tag:blogger.com,1999:blog-7530776363222965313.post-36052845125622792132015-01-11T13:31:00.000+01:002015-01-11T13:31:03.271+01:00Liberté, Egalité, FraternitéIn december 2013, I was made a French citizen, in an official ceremony that moved me. There were hundreds of us, from all parts of the world, who were given the honour of French citizenship.<br /><br />One of the reasons that I am proud to be French (I have kept my British nationality too) lies in the truly remarkable set of principles that were written in stone in 1789 in the Declaration of the Rights of Man and of the Citzen - principles&nbsp; that are the cornerstone of the French Nation. During the ceremony, we were all given a document which listed the 17 articles of the declaration. For me, there is not a single word in those 17 articles that are not absolutely vital even today.<br /><br />The original texts are <a href="http://www.legifrance.gouv.fr/Droit-francais/Constitution/Declaration-des-Droits-de-l-Homme-et-du-Citoyen-de-1789">here.</a> But here is a translation into English:<br /><br />Articles:<br /> <ol><li>Men are born and remain free and equal in rights. Social distinctions may be founded only upon the general good.</li><li>The aim of all political association is the preservation of the natural and imprescriptible rights of man. These rights are liberty, property, security, and resistance to oppression.</li><li>The principle of all sovereignty resides essentially in the nation. No body nor individual may exercise any authority which does not proceed directly from the nation.</li><li>Liberty consists in the freedom to do everything which injures no one else; hence the exercise of the natural rights of each man has no limits except those which assure to the other members of the society the enjoyment of the same rights. These limits can only be determined by law.</li><li>Law can only prohibit such actions as are hurtful to society. Nothing may be prevented which is not forbidden by law, and no one may be forced to do anything not provided for by law.</li><li>Law is the expression of the general will. Every citizen has a right to participate personally, or through his representative, in its foundation. It must be the same for all, whether it protects or punishes. All citizens, being equal in the eyes of the law, are equally eligible to all dignities and to all public positions and occupations, according to their abilities, and without distinction except that of their virtues and talents.</li><li>No person shall be accused, arrested, or imprisoned except in the cases and according to the forms prescribed by law. Any one soliciting, transmitting, executing, or causing to be executed, any arbitrary order, shall be punished. But any citizen summoned or arrested in virtue of the law shall submit without delay, as resistance constitutes an offense.</li><li>The law shall provide for such punishments only as are strictly and obviously necessary, and no one shall suffer punishment except it be legally inflicted in virtue of a law passed and promulgated before the commission of the offense.</li><li>As all persons are held innocent until they shall have been declared guilty, if arrest shall be deemed indispensable, all harshness not essential to the securing of the prisoner's person shall be severely repressed by law.</li><li>No one shall be disquieted on account of his opinions, including his religious views, provided their manifestation does not disturb the public order established by law.</li><li>The free communication of ideas and opinions is one of the most precious of the rights of man. Every citizen may, accordingly, speak, write, and print with freedom, but shall be responsible for such abuses of this freedom as shall be defined by law.</li><li>The security of the rights of man and of the citizen requires public military forces. These forces are, therefore, established for the good of all and not for the personal advantage of those to whom they shall be entrusted.</li><li>A general tax is indispensable for the maintenance of the public force and for the expenses of administration; it ought to be equally apportioned among all citizens according to their means.<sup class="reference" id="cite_ref-Declaration_of_the_Rights_of_Man_and_the_Citizen_.28August_1789.29_19-0"><a href="http://en.wikipedia.org/wiki/Declaration_of_the_Rights_of_Man_and_of_the_Citizen#cite_note-Declaration_of_the_Rights_of_Man_and_the_Citizen_.28August_1789.29-19"><span></span></a></sup></li><li>All the citizens have a right to decide, either personally or by their representatives, as to the necessity of the public contribution; to grant this freely; to know to what uses it is put; and to fix the proportion, the mode of assessment and of collection and the duration of the taxes.</li><li>Society has the right to require of every public agent an account of his administration.</li><li>A society in which the observance of the law is not assured, nor the separation of powers defined, has no constitution at all.</li><li>Property being an inviolable and sacred right, no one can be deprived of it, unless demanded by public necessity, legally constituted, explicitly demands it, and under the condition of a just and prior indemnity.</li></ol>I'm proud to be a citizen of the country that established this list. Is there one word in that Declaration that any reasonable person could contest? <br /><br />And I was proud yesterday, to have been among the 120,000 people in Toulouse who marched together to say "Je suis Charlie".&nbsp; I have <a href="https://www.youtube.com/watch?v=3wDb2lY6xRE&amp;list=UUBzcvWOt_GeQM8hldUZxuIQ">posted a video that I took from the very centre of the Place Jean Jaurés</a> - I was truly moved to be part of such a collective demonstration of support for the very principles of our society.<br /><br /><div class="separator" style="clear: both; text-align: center;"><object width="320" height="266" class="BLOGGER-youtube-video" classid="clsid:D27CDB6E-AE6D-11cf-96B8-444553540000" codebase="http://download.macromedia.com/pub/shockwave/cabs/flash/swflash.cab#version=6,0,40,0" data-thumbnail-src="https://i.ytimg.com/vi/3wDb2lY6xRE/0.jpg"><param name="movie" value="https://www.youtube.com/v/3wDb2lY6xRE?version=3&f=user_uploads&c=google-webdrive-0&app=youtube_gdata" /><param name="bgcolor" value="#FFFFFF" /><param name="allowFullScreen" value="true" /><embed width="320" height="266" src="https://www.youtube.com/v/3wDb2lY6xRE?version=3&f=user_uploads&c=google-webdrive-0&app=youtube_gdata" type="application/x-shockwave-flash" allowfullscreen="true"></embed></object></div><br />Today, we expect to see more than a million people marching in Paris in defense of our basic shared principles. And the fact that so many heads of state will be there as well gives me a real sense that people have realized that there are some basic principles that we have to defend. Those principles are in the foundations of the French Nation.Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com1tag:blogger.com,1999:blog-7530776363222965313.post-580952879115334122015-01-11T11:14:00.000+01:002015-01-11T12:16:50.939+01:00Deleveraging? What Deleveraging? We need to fix the system...<a href="http://3.bp.blogspot.com/-ECEdT0b_mAQ/VLI2jV_WtHI/AAAAAAAAB8I/oVvO77aj6A8/s1600/GenevaReport1.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="http://3.bp.blogspot.com/-ECEdT0b_mAQ/VLI2jV_WtHI/AAAAAAAAB8I/oVvO77aj6A8/s1600/GenevaReport1.png" height="200" width="135" /></a>In <a href="http://simonthorpesideas.blogspot.fr/2015/01/an-open-letter-to-mario-draghi.html">my open letter to Mario Draghi</a>, president of the ECB, I mentioned a remarkable report that was published last September called <a href="http://www.voxeu.org/sites/default/files/image/FromMay2014/Geneva16.pdf">"Deleveraging? What deleveraging?"</a><br /><br />It was published by the <a href="http://www.icmb.ch/ICMB/Home.html">International Center for Monetary and Banking Studies</a> in Geneva and the <a href="http://www.cepr.net/">Centre for Economic Policy Research</a> in London - both highly respectable authorities - following a conference that was attended by about 70 experts.<br /><br /><br /><br /><br /><br /><br />The main point of the report is to argue that, since the global financial crisis in 2008-9, although there have been attempts by governments to reduce their debt levels, overall debt has continued to soar. This is obvious from the first graph shown in the report.<br /><div class="separator" style="clear: both; text-align: center;"><a href="http://3.bp.blogspot.com/-7LZWr5iov_Y/VLI2taNNS4I/AAAAAAAAB8Q/b2j1_SUZ0Z8/s1600/GenevaReport2.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="http://3.bp.blogspot.com/-7LZWr5iov_Y/VLI2taNNS4I/AAAAAAAAB8Q/b2j1_SUZ0Z8/s1600/GenevaReport2.png" height="368" width="640" /></a></div><br />It shows that total world debt had reached nearly 215% of total GDP, with absolutely no sign whatsoever that things were improving at all.<br /><br />They follow up this sobering graph with other graphs showing the breakdown of where the debt is, with separate plots for the developed and emerging markets.<br /><div class="separator" style="clear: both; text-align: center;"><a href="http://1.bp.blogspot.com/-ItyuTlUWH1o/VLI3gOwT58I/AAAAAAAAB8Y/apI18ybGVR0/s1600/GenevaReport3.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://1.bp.blogspot.com/-ItyuTlUWH1o/VLI3gOwT58I/AAAAAAAAB8Y/apI18ybGVR0/s1600/GenevaReport3.png" height="640" width="536" /></a></div><br />Debt in the developed markets is still increasing, and is currently around $190 trillion. In contrast, for emerging markets, the total is increasing rapidly, with over $45 trillion of debt in 2013.<br /><br />If you want gory details, they provide a table with the Debt to GDP ratios as a percentage for individual countries and regions. As you can see, no-one seems to be able to avoid the debt trap. NOt even the Chinese, whose debt levels total 217% of GDP, not including the Banking sector. <br /><div class="separator" style="clear: both; text-align: center;"><a href="http://1.bp.blogspot.com/-G5AsYjgtPPQ/VLI4IJ5OlhI/AAAAAAAAB8g/SY8jZq0t5xs/s1600/GenevaReport4.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://1.bp.blogspot.com/-G5AsYjgtPPQ/VLI4IJ5OlhI/AAAAAAAAB8g/SY8jZq0t5xs/s1600/GenevaReport4.png" height="640" width="606" /></a></div><br />Table 2.2 provides an even more detailed breakdown for developed countries.<br /><div class="separator" style="clear: both; text-align: center;"><a href="http://1.bp.blogspot.com/-dRKI-isiOXo/VLI5zK37f2I/AAAAAAAAB8s/lZSmorc7DmM/s1600/GenevaReport7.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="http://1.bp.blogspot.com/-dRKI-isiOXo/VLI5zK37f2I/AAAAAAAAB8s/lZSmorc7DmM/s1600/GenevaReport7.png" height="370" width="640" /></a></div><br /><br />You can see how all those numbers are calculated. Total debt is equal to Domestic plus External debt. But it is also equal to the sum of Financial (d), Public (f), Household (h) and Non-financial company (i.e. business) debt (i).<br /><br />To make the figures clearer, I took that table and compiled my own table and ranked the countries by total debt. <br /><div class="separator" style="clear: both; text-align: center;"><a href="http://1.bp.blogspot.com/-PkdcOPkw44k/VLJDiOrU86I/AAAAAAAAB88/rTVupEysok4/s1600/GenevaReport8.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://1.bp.blogspot.com/-PkdcOPkw44k/VLJDiOrU86I/AAAAAAAAB88/rTVupEysok4/s1600/GenevaReport8.png" height="323" width="400" /></a></div>Clearly, Ireland is in a particularly bad way - everyone seems to be heavily in debt. But a lot of that is due to Financial Sector debt. The Netherlands is also seriously compromised by its Banking sector, as is the UK. For some reason, Germany gets away well, despite having a very large banking sector, with major players like Deutch Bank. <br /><br />There's also some detailed analysis of debt structure in the US, illustrated in the following graph. You can see that if there has been a slight decrease in overall debt to the current value of 362% of GDP, that decrease is essentially due to decreased leverage in the financial sector, with a slight decrease in household debt. But that has been offset to a large extend by the increase in GSE debt - Government Sponsored Enterprises. I guess that is tax payer bailouts for things like Automobile manufacturers.<br /><div class="separator" style="clear: both; text-align: center;"></div><br /><div class="separator" style="clear: both; text-align: center;"><a href="http://3.bp.blogspot.com/-r1JejYfn2I4/VLJExTagyBI/AAAAAAAAB9Q/B2TmX0OIQNw/s1600/GenevaReport5.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="http://3.bp.blogspot.com/-r1JejYfn2I4/VLJExTagyBI/AAAAAAAAB9Q/B2TmX0OIQNw/s1600/GenevaReport5.png" height="448" width="640" /></a></div><br />And finally, there's a specific analysis of debt levels in the Eurozone. It doesn't have the detailed breakdown provided for the<br /><div class="separator" style="clear: both; text-align: center;"><a href="http://2.bp.blogspot.com/-KjKKAaxRpu8/VLJEmBRbEeI/AAAAAAAAB9I/V2uZ7omR9mY/s1600/GenevaReport6.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="http://2.bp.blogspot.com/-KjKKAaxRpu8/VLJEmBRbEeI/AAAAAAAAB9I/V2uZ7omR9mY/s1600/GenevaReport6.png" height="332" width="640" /></a></div><br />The latest value - 385% of GDP -&nbsp; has indeed involved a slight drop compared with 2012. But it's hardly anything to really reassure anyone.<br /><br />For me, the conclusions from this are clear. You can try austerity as a way to decrease government debt. But that will do nothing to fix the overall problem - namely, the fact that there is simply far too much debt in the system.<br /><br />As I pointed out some time ago, in a global economy in which <a href="http://simonthorpesideas.blogspot.fr/2013/04/total-global-debt-and-money-supply.html">there is twice as much debt as there is money,</a> there is really no way that you can hope to get out of the mess. You can't pay off debt by borrowing more. Any idiot should know that.<br /><br />And yet, none of the "experts" at the Conference that generated this report seemed to have any real proposals about how to stop this insane debt explosion. <br /><br />It seems to me that there are only a very limited range of options. Some people think that we could fix things by just cancelling debt. European governments could just tell the banks to get stuffed. And that may happen, especially if the forthcoming elections in Greece go the way people expect them to go.<br /><br />But there is a much better way. A way that will fix the system for good. It involves replacing the current insane debt-based money creation process where essentially all the money in the system is created out of thin air by commercial banks when they make loans.<br /><br />What we need is for our Central Banks to create the money debt free. It's what Positive Money have been arguing for with their <a href="http://www.positivemoney.org/our-proposals/sovereign-money-creation/">Sovereign Money Creation proposal.</a> But it could also be done by simple creating money at the level of Central Banks and putting the money directly into citizens' bank accounts.<br /><br />That's essentially what would happen if we introduced an Unconditional Basic Income, financed by a minute Financial Transaction Tax. Within a few years, the mountain of debt revealed by this report could be paid off with debt-free money.&nbsp; <br /><br />Is anyone listening??Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com0tag:blogger.com,1999:blog-7530776363222965313.post-71268196822309809432015-01-11T09:07:00.001+01:002015-01-11T09:07:33.937+01:00An open letter to Mario Draghi - President of the European Central BankDear Sir,<br /><br />Inflation in the Eurozone is now negative - specifically <a href="http://www.theguardian.com/business/2015/jan/07/eurozone-deflation-pressure-ecb-qe">-0.2% in December.</a>&nbsp; About the only thing that the European Central Bank is formally required to do is keep inflation at around the so-called optimal value of 2%. So, clearly, you are not doing a very good job.<br /><br />I won't go into the question of why 2% is the "perfect" number. I'll just note that in a system where 97% of money is created as debt by commercial banks when they make loans, you probabably need inflation in order to pay the interest. But there can be no doubt that you will currently be under a lot of pressure to start pumping money into the economy to try and get the Eurozone economy working again.<br /><br />Unfortunately, as you know perfectly well, the conventional method, which involves throwing huge amounts of money at commercial banks and praying, doesn't work. You tried that within a few weeks of taking office back in 2011 when <a href="http://www.theguardian.com/business/2012/feb/29/ecb-emergency-loans-european-banks">you threw 1 trillion euros of very cheap money at hundreds of banks at December 2011 and February 2012</a>. You provided 3-year loans at 1% interest, and of course, the banks will now have to pay the money back.<br /><br />So, I suppose that you could throw another trillion at them, and do a bit more praying. Their lobbyists will certainly be pushing for that.<br /><br />But the simple fact is that nobody wants more debt. Citizens don't want more debt. Businesses don't want more debt. Governments don't want more debt. And even Banks don't want more debt. As <a href="http://www.voxeu.org/content/deleveraging-what-deleveraging-16th-geneva-report-world-economy">the 16th Geneva Report on the World Economy pointed out last september </a>"the world has not yet begun to deleverage its crisis-linked borrowing. Global debt-to-GDP is breaking new highs in ways that hinder recovery in mature economies and threaten new crisis in emerging nations – especially China." <br /><br />What we all need is some real debt free money. And that is where you could do something truly useful. As the head of a central bank, you should have the power to create the Eurozone's money. And you should do that money creation without creating simultaneously another mountain of debt.<br /><br />How could you do that?&nbsp; <br /><br /><div class="d2-body"> Well, here's my proposal. <b>The ECB should simply inject money directly into peoples' pockets.&nbsp;</b><br /><br /> This could be done by creating ECB accounts for all Eurozone citizens via the Central Banks in each country. It would be essentially a huge excel sheet with 330 million entries - one for each Eurozone citizen. Citizens would be able to connect their ECB account to their normal bank accounts - just like you can currently connect a Paypal account to your bank account.<br /><br /> And then, when money needs injecting into the economy, you would just have to type "Add X euros" on the keyboard of the ECB's computer and bingo - there is X*330 million extra euros in the economy. As simple as that. No need for Quantitative Easing - which is effectively throwing money at Bankers and praying. No need to give money to governments (which you are not allowed to do because of the Lisbon treaty). But I don't think that there is anything that would stop you just putting new money into the economy this way - except of course massive resistance from the Banking sector. <br /><br /> Why would the Banks be so opposed? The reason is that, unlike the current money creation system, in which as much as&nbsp;<a href="http://www.positivemoney.org/" rel="nofollow" target="_blank"> 97% of the money in circulation is created by commercial banks as debt</a>, this ECB generated money would be debt free, with no interest to pay.<br /><br /> What! No interest to pay! That is why we can expect massive resistance from the Bankers and the politicians that they control. After all, the Banks have been used to charging interest for lending fictitious money to individuals, businesses and governments since the creation of the Bank of England in 1694. For info, since that time, <a href="http://simonthorpesideas.blogspot.fr/2014/11/the-biggest-racket-in-history-how-banks.html" rel="nofollow" target="_blank">UK taxpayers have paid an average of 4.4% of GDP as interest payments on public sector debt alone</a>. And 57.1% of all Public sector debt in the Eurozone (€5.2 trillion of the €9 trillion at the end of 2013) is entirely explained by the interest payments made on government debt since 1995 - as <a href="http://simonthorpesideas.blogspot.fr/2014/04/european-government-debt-and-interest.html">your own figures show</a>.<br /><br />Interestingly, <a href="http://simonthorpesideas.blogspot.fr/2014/04/bernard-maris-reveals-truth-about-how.html" rel="nofollow" target="_blank">this fact that commercial banks simply create our money supply out of thin air when they make loans, was stated with mindblowing clarity in a video last year by Bernard Maris</a>, the French Economist massacred this week in the offices of Charlie Hebdo. His loss is absolutely tragic, but at least <a href="http://simonthorpesideas.blogspot.fr/2015/01/bernard-maris-hero.html" rel="nofollow" target="_blank">the number of people who have watched this important video has increased by 250% in the last few days</a>.....<br /><br /> So, we can certainly expect massive resistance from the Bankers. They will fight like wild-cats to keep their gravy train on the rails. And, since <a href="http://en.wikipedia.org/wiki/Mario_Draghi" rel="nofollow" target="_blank">you were previously vice chairman and managing director of Goldman Sachs International (2002-5)</a>, it's just possible that you may be more interested in protecting the interests of your friends in the Banking sector than helping European Citizens. Please, please, prove me wrong.<br /><br /> The fact is that there is no justification for allowing the money creation process to be the exclusive priviledge of commercial banks. Indeed, <a href="http://simonthorpesideas.blogspot.fr/2012/08/the-chicago-plan-revisited.html" rel="nofollow" target="_blank">even economists at the IMF demonstrated that taking money creation away from commercial banks and tranferring that responsibility to central banks makes perfect sense</a>. Specifically, they proved all four of Irving Fisher's claims for such a system when he proposed the so-called Chicago plan in the 1930s, namely <i>(1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money. (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt. (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation.</i> <br /> <br />Somehow the Banking Lobbies apparently managed to get politicians (and economists) to forget about that one - just possibly because that's how they make nearly all their money. Perhaps you can explain to us what would be so terrible with such a proposition? <br /><br /> Oh, and if anyone wants to claim that this will produce Zimbabwe style hyperinflation, can I suggest that you could introduce an ECB regulated flat-rate Financial Transaction Tax on all Euro-denominated trading - wherever they occur in the world. <a href="http://simonthorpesideas.blogspot.fr/2015/01/my-hope-for-2015-lets-start-taxing-all.html" rel="nofollow" target="_blank">Last year, LCH Clearnet Ltd, based in London, did €238,447,455,975,386 in Euro-denominated trades. </a> A 0.01% tax on that lot would remove €24 billion from the system. Indeed, if needed, you could use the revenue generated by such a tax to directly finance an Unconditional Basic Income for all Eurozone citizens.<br /><br />Imagine. With just two simple levers - one that pumps debt-free money into Eurozone citizens pockets, and one that sucks money out of the system in the form of a simple transaction tax - you would be able to do your job properly.<br /> </div>Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com0tag:blogger.com,1999:blog-7530776363222965313.post-63294572179950435122015-01-08T04:17:00.000+01:002015-01-08T04:17:32.858+01:00Bernard Maris - A hero The islamist lunatics that caused the massacre at Charlie Hebdo took the life of Bernard Maris - one of my true heros.<br /><br />Bernard was one of the very few economists that I have heard who spoke the truth. I very much hope that all his regular contributions to his "Oncle Bernard" column in Charlie Hebdo (he was one of the share-holders in the magazine) will be published in full. I heard him virtually every week on France Inter where his weekly debates with a Dominique Sceu, a journalist at the Echos newspaper were alwas fascinating.<br /><br />Perhaps one good thing that may come of yesterdays carnage is the fact that since yesterday afternoon, hundreds of people have watched the Youtube clip that I posted last year where Bernard explains the truth about how money is created out of thin air by commercial banks when they make loans. At 4pm yesterday, there had been 7825 people who had looked at it. 12 hours later, the number has jumped to 9219 and rising.<br /><br /><div class="separator" style="clear: both; text-align: center;"><object width="320" height="266" class="BLOGGER-youtube-video" classid="clsid:D27CDB6E-AE6D-11cf-96B8-444553540000" codebase="http://download.macromedia.com/pub/shockwave/cabs/flash/swflash.cab#version=6,0,40,0" data-thumbnail-src="https://i.ytimg.com/vi/B6H2v4DaEyo/0.jpg"><param name="movie" value="https://www.youtube.com/v/B6H2v4DaEyo?version=3&f=user_uploads&c=google-webdrive-0&app=youtube_gdata" /><param name="bgcolor" value="#FFFFFF" /><param name="allowFullScreen" value="true" /><embed width="320" height="266" src="https://www.youtube.com/v/B6H2v4DaEyo?version=3&f=user_uploads&c=google-webdrive-0&app=youtube_gdata" type="application/x-shockwave-flash" allowfullscreen="true"></embed></object></div>See my<a href="http://simonthorpesideas.blogspot.fr/2014/04/bernard-maris-reveals-truth-about-how.html"> earlier post on this</a> for a full translation into English.Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com0tag:blogger.com,1999:blog-7530776363222965313.post-21198400672158088022015-01-08T04:00:00.001+01:002015-01-08T07:16:36.820+01:00Je suis CharlieWhen I heard about <a href="http://www.theguardian.com/world/live/2015/jan/07/charlie-hebdo-magazine-shooting-france-police-manhunt-suspects">the carnage in the Charlie Hebdo offices in Paris yesterday</a>, I felt physically sick. It was an act of war against everything I believe in - the right to free speech, the right to riducule the stupid and the ignorant.<br /><br />Last night, in an attempt to show my solidarity with the heros at Charlie Hebdo, I stuck these images on the windows of our car. I hope that when I go to work today, many of my compatriots (I'm Franco-British) will do similar acts of solidarity.<br /><div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: center;"><a href="http://4.bp.blogspot.com/-Cd82-3kZPVY/VK3wjrQxUVI/AAAAAAAAB7I/Fi868VtrA_s/s1600/Charlie.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://4.bp.blogspot.com/-Cd82-3kZPVY/VK3wjrQxUVI/AAAAAAAAB7I/Fi868VtrA_s/s1600/Charlie.png" height="320" width="244" />&nbsp;</a></div><div class="separator" style="clear: both; text-align: center;">Mohamed overwhelmed by the Integristes : "It's tough being loved by cretins" </div><div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: center;"><a href="http://3.bp.blogspot.com/-HWPtBhDwxe4/VK3xL-LXTOI/AAAAAAAAB7Q/njvSwqtm9Is/s1600/Charlie6.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://3.bp.blogspot.com/-HWPtBhDwxe4/VK3xL-LXTOI/AAAAAAAAB7Q/njvSwqtm9Is/s1600/Charlie6.png" height="320" width="248" />&nbsp;</a></div><div class="separator" style="clear: both; text-align: center;">Love : Stronger than Hate </div><div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: center;"><a href="http://1.bp.blogspot.com/-BtLmbRIo9LI/VK3wfy6KECI/AAAAAAAAB7A/4KhyrS8vCck/s1600/Charlie3.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://1.bp.blogspot.com/-BtLmbRIo9LI/VK3wfy6KECI/AAAAAAAAB7A/4KhyrS8vCck/s1600/Charlie3.png" height="312" width="320" /></a></div><div class="separator" style="clear: both; text-align: center;"><a href="http://2.bp.blogspot.com/-wkFAbQxNxlI/VK3xZxYqaiI/AAAAAAAAB7g/m9dC4_k8AhQ/s1600/Charlie4.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://2.bp.blogspot.com/-wkFAbQxNxlI/VK3xZxYqaiI/AAAAAAAAB7g/m9dC4_k8AhQ/s1600/Charlie4.png" height="231" width="320" /></a></div><div class="separator" style="clear: both; text-align: center;"><a href="http://4.bp.blogspot.com/-2soBFP9BreY/VK3xNpf9dfI/AAAAAAAAB7Y/f-DOpoBbmS0/s1600/Charlie5.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://4.bp.blogspot.com/-2soBFP9BreY/VK3xNpf9dfI/AAAAAAAAB7Y/f-DOpoBbmS0/s1600/Charlie5.png" height="206" width="320" /></a></div><div class="separator" style="clear: both; text-align: center;"><a href="http://4.bp.blogspot.com/-5k40ERsnNK0/VK4gsAl5UaI/AAAAAAAAB74/FuhKxNUWnPw/s1600/Charlie7.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://4.bp.blogspot.com/-5k40ERsnNK0/VK4gsAl5UaI/AAAAAAAAB74/FuhKxNUWnPw/s1600/Charlie7.png" height="240" width="320" /></a></div><br />Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com0tag:blogger.com,1999:blog-7530776363222965313.post-41002558376814177442015-01-01T17:10:00.000+01:002015-01-01T17:10:08.437+01:00Options Clearing Corporation - Figures for 2014Following up from<a href="http://simonthorpesideas.blogspot.fr/2015/01/my-hope-for-2015-lets-start-taxing-all.html"> my latest post on the amount of trading going on at LCHClearnet</a>, here's the latest info concerning that other key player - the Options Clearing Corporation. I just went and got the latest up to date figures from <a href="http://www.optionsclearing.com/webapps/monthly-volume-reports">their website</a>.<br /><br />I've note been able to get direct numbers for the value of the transactions that they handle, but here are the figures for the numbers of trades, and the amount of premiums that they generated in 2014. I include the figures for 2013 and 2012 for comparison (see my previous posting for more detail).<br /><div class="separator" style="clear: both; text-align: center;"><a href="http://1.bp.blogspot.com/-7oQTGbg2A9o/VKVawy90PhI/AAAAAAAAB6Y/REjL1V6gViU/s1600/OCC2014.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="http://1.bp.blogspot.com/-7oQTGbg2A9o/VKVawy90PhI/AAAAAAAAB6Y/REjL1V6gViU/s1600/OCC2014.png" height="291" width="640" /></a></div><br />The number of cleared contracts has increased by about 3.7% since 2013, and led to total premiums of $1.21 trillion. It would appear that contracts typically generate premiums of $140 for ETF options, $220 for equity options, and around $800 for Index options, although the precise amount appears to vary from exchange to exchange.<br /><br />However, I don't know if there is any way to determine what the total value of the contracts is.&nbsp; If anyone knows how to estimate that number, please leave a comment.<br /><br />I have also taken the opportunity to look at the history of OCC, because they provide historical tables about the numbers of different types of trades that they have handled every year since they were created in 1973.<br /><div class="separator" style="clear: both; text-align: center;"><a href="http://2.bp.blogspot.com/-lgLROI1DJUI/VKVd46uzoGI/AAAAAAAAB6k/hVI79A9RUZw/s1600/OCCHistory.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="http://2.bp.blogspot.com/-lgLROI1DJUI/VKVd46uzoGI/AAAAAAAAB6k/hVI79A9RUZw/s1600/OCCHistory.png" height="454" width="640" /></a></div>You can see that acivity exploded in the period from 2002 to 2008. There was a slight falter after that, but total transactions peaked at over 4.6 billion in 2011. Since then, activity dropped a bit but is on its way back up again. The vast majority of the trading in in equity (89%), with non-equity trades accounting for just 10%, and futures around 1.5%.<br /><br />Message to any politician who wants to be elected. Just tax these transactions at some trivial level - say 0.1%. You would make yourself very popular....Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com0tag:blogger.com,1999:blog-7530776363222965313.post-61971234613251458932015-01-01T10:07:00.002+01:002015-01-01T12:49:44.912+01:00My hope for 2015 - Let's start taxing all trading in Euros - wherever they occur in the world.Here's my number one wish for 2015. I hope and pray that someone out there will realise that there is a very simple thing that we can do that would go a long way towards resolving our problems. Central Banks, and in particular the European Central Bank, should introduce a flat rate Financial Transaction Tax on<b> all</b> transactions denominated in their currency - <b>wherever they occur in the world.</b><br /><br />The ease with which this could be done is made blindingly obvious if you just take a look at <a href="http://www.swapclear.com/what/clearing-volumes.html">the clearing volumes reports on LCH.Clearnet's website</a>. I love these people because they very kindly provide a day by day listing of all trading, with details for each of 16 different currencies.<br /><br />I just extracted the latest information, which includes all the trading done in 2014. <br /><div class="separator" style="clear: both; text-align: center;"><a href="http://1.bp.blogspot.com/-HxHaSboeT-k/VKUAR6-6I1I/AAAAAAAAB5g/MwQfsrZ3Nuo/s1600/LCHSwapClear2014.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://1.bp.blogspot.com/-HxHaSboeT-k/VKUAR6-6I1I/AAAAAAAAB5g/MwQfsrZ3Nuo/s1600/LCHSwapClear2014.png" height="352" width="400" /></a></div>You can see that LCHClearnet processed a total of nearly $642 trillion in 2014. But the really impressive fact is that nearly 50% of those trades were carried out in Euros - €238,447,455,975,386 to be precise.<br /><br />LCHClearnet also very obligingly tells us precisely what those trades involved. Here is the breakdown.&nbsp; <br /><div class="separator" style="clear: both; text-align: center;"><a href="http://3.bp.blogspot.com/-nZe9ZI2_FXI/VKUB7AE0jfI/AAAAAAAAB5o/4O_CBSu8yuc/s1600/LCHSwapClear2014Euros.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://3.bp.blogspot.com/-nZe9ZI2_FXI/VKUB7AE0jfI/AAAAAAAAB5o/4O_CBSu8yuc/s1600/LCHSwapClear2014Euros.png" height="130" width="400" /></a></div>You can see that nearly 47% of those trades involved Overnight Indexed Swaps, with 33% in Forward Rate Agreements, and 19.5% of Interest Rate Swaps.&nbsp; <br /><br />So, if the ECB wanted to, it could easily slap a 0.1% transaction tax on all Euro-denominated transactions. And LCHClearnet would have handed over up to €248 billion for its operations in 2014 And that's just one company -<a href="http://simonthorpesideas.blogspot.fr/2014/10/bis-financial-transaction-data-for-2013.html"> a company whose trading activity hasn't even been included in the Bank for International Settlement's annual report since 2009</a>. I've already <a href="http://simonthorpesideas.blogspot.fr/2012/10/lchclearnet-ltd-3544-trillion-of-otc.html">complained bitterly about that for year</a>s. Clearly, the BIS just needs to have someone with internet access and they could do this themselves.<br /><br />The LCHClearnet website provides plenty of other interesting information. For example, here is their barchart of the volume of trades by month. <br /><div class="separator" style="clear: both; text-align: center;"><a href="http://4.bp.blogspot.com/-55bOc_qw3RE/VKUDpgOE6MI/AAAAAAAAB5w/qGiwfCdb6x0/s1600/LCHMonthlyVolumes.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://4.bp.blogspot.com/-55bOc_qw3RE/VKUDpgOE6MI/AAAAAAAAB5w/qGiwfCdb6x0/s1600/LCHMonthlyVolumes.png" height="270" width="400" /></a></div>Just point your mouse at each column and you get the actual value.The best month was june, where LCHClearnet handled an impressive $69 trillion in a single month.<br /><br />They also have a chart with the number of trades per month.<br /><div class="separator" style="clear: both; text-align: center;"><a href="http://4.bp.blogspot.com/-q1NyQT0PD_s/VKUHjJb6REI/AAAAAAAAB6A/J7FDlPpJBpQ/s1600/LCHMonthlyTrades.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://4.bp.blogspot.com/-q1NyQT0PD_s/VKUHjJb6REI/AAAAAAAAB6A/J7FDlPpJBpQ/s1600/LCHMonthlyTrades.png" height="270" width="400" /></a></div><div class="separator" style="clear: both; text-align: center;"></div>So, from those two sets of numbers, I was able to generate the following set of data that shows they handled ovef 2.5 million trades in a year, and that the average trade has a value of around $250 million.<br /><div class="separator" style="clear: both; text-align: center;"><a href="http://4.bp.blogspot.com/-5VUw4NGSNHw/VKUIrPLC4UI/AAAAAAAAB6I/HJK3qMvkJxY/s1600/LCHAverageValue.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://4.bp.blogspot.com/-5VUw4NGSNHw/VKUIrPLC4UI/AAAAAAAAB6I/HJK3qMvkJxY/s1600/LCHAverageValue.png" height="312" width="320" /></a></div>Clearly, it's not the average pensioner who is going to be moving $250 million around with every click of a button.<br /><br />So, lets do it. Let's have a modest 0.1% tax on all those Euro transactions - collected by which ever central bank is in control (in this case the Bank of England, because we are talking about a trading center based in the London), and transfered to the European Central Bank. The ECB could then (a) distribute the money among the governments of the 17 Eurozone countries simply on the basis of population size, or (b) provide money directly to Eurozone citizens. Or it could do both. I would say that a 50/50 split between governments and citizens would work very nicely thank you.<br /><br />Note that while LCHClearnet handled just over 2.5 million transactions in 2014, this is peanuts compared with my favourite Clearing centre - the Options Clearing Corporation. <a href="http://simonthorpesideas.blogspot.fr/2014/03/financial-transactions-in-us-some-new.html">They handled over 4.1 billion contracts in 2013</a> - resulting in 287 million actual transactions - over 100 times more&nbsp; LCHClearnet. Unfortunately, I have no way of knowing either the total value of those trades. Nor do I have any way of knowing what proportion of those trades are in Euros.<br /><br />But, if the ECB were to do what I propose, we could find out pretty fast.<br /><br />What are we waiting for? Oh, I remember. Mario Draghi, the president of the ECB was previously the vice chairman and managing director of <a href="http://en.wikipedia.org/wiki/Goldman_Sachs" title="Goldman Sachs">Goldman Sachs</a> International and a member of the firm-wide management committee (2002–2005). Maybe, just maybe, he might not be too interested in doing what would be good for citizens in the Eurozone. Prove me wrong - please!<br /><table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse; width: 123px;"><tbody><tr height="17" style="height: 17.0pt; mso-height-source: userset;"><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td><td align="right" class="xl64" height="17" style="height: 17.0pt; width: 123pt;" width="123"><br /></td> </tr></tbody></table>Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com0tag:blogger.com,1999:blog-7530776363222965313.post-73696793760306025932014-12-30T12:27:00.000+01:002014-12-30T12:53:53.445+01:00How to introduce an Unconditional Basic IncomeRegular readers of my blog are hopefully well aware that I am a big fan of the idea of having an Unconditional Basic Income for all citizens. And I have proposed that <a href="http://simonthorpesideas.blogspot.fr/2014/10/an-open-letter-to-my-colleague-jean.html">it would be a very good idea to finance it using a tiny Universal Financial Transaction Tax on all electronically mediated transactions in a given currency, wherever they occur in the world</a>. I estimate that with at least €2 quadrillion in euro denominated transactions occuring per year, the European Central Bank could impose a 0.1% tax that could raise enough to pay every man, woman and child in the Eurozone a basic income of 6000 euros a year (500€ a month).<br /><br />Of course, the standard response is to say that as soon as you introduce even a tiny 0.1% charge,&nbsp; virtually all trading will cease, and there will be nothing left to tax. I think that this argument is totally spurious. After all, virtually <a href="http://simonthorpesideas.blogspot.fr/2011/12/ftts-and-credit-cards-again.html">all banks will charge you a 2.75% or even 2.99% international charge</a> for using your credit card in another currency - 30 times the amount I am talking about. That fee is on top of the 3-4% paid by the merchant, and is effectively a charge for multiplying the amount paid in a foreign currency by the current exchange rate. It's outrageous, especially since we know that the banks and traders do over <a href="http://simonthorpesideas.blogspot.fr/2013/09/bis-triennial-report-53-trillion-of.html">$5 trillion in foreign exchange PER DAY</a> without paying anything. But those 2.75% charges don't&nbsp; stop me from using my card in the UK or the USA when travelling to pay for restaurants, hotels and the like.<br /><br />Nevertheless, just to prove that we don't even need to finance the Unconditional Basic Income with the Financial Transaction Tax, let me just mention another neat idea for how you could introduce such a system in a country like France.<br /><br />Let's have a look at where French Government spending goes, based <a href="http://www.performance-publique.budget.gouv.fr/sites/performance_publique/files/farandole/ressources/medias/documents/ressources/PLF2013/rapport_depense_2013.pdf">on an official report on public spending that came out in 2013</a>. On page 16 you can find the following pie chart.<br /><div class="separator" style="clear: both; text-align: center;"><a href="http://3.bp.blogspot.com/-zlsK6qlrnZA/VKJ7KfBkHTI/AAAAAAAAB5Q/Qog9WqJJiR4/s1600/FrenchPublicSpending.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://3.bp.blogspot.com/-zlsK6qlrnZA/VKJ7KfBkHTI/AAAAAAAAB5Q/Qog9WqJJiR4/s1600/FrenchPublicSpending.png" height="262" width="400" /></a></div><br />I won't bother insisting on the outrageous interest payments (4.7% of all government spending), except to point out that these are interest payments made on loans to the government that can be created out of thin air by banks that, <a href="http://simonthorpesideas.blogspot.fr/2014/03/the-biggest-bank-scam-of-them-all-banks.html">thanks to the wonderful Basel Banking Regulations, can be made with no capital whatsover</a>. Enough said.<br /><br />You can see that 23.6% of spending goes on Salary costs for public sector employees like myself (I work for the CNRS), but an even more impressive 45.7% goes on social benefits (unemployment, health care, housing benefits etc etc).<br /><br />Now, o<a href="http://fr.wikipedia.org/wiki/Secteur_public_en_France">ver 6 million people in France are employed in the public sector</a> - that's about 23% of all employed people. There are 66 million people in France. Of these, <a href="http://fr.wikipedia.org/wiki/Population_active#Part_de_l.27emploi_publicfr.wikipedia.org/wiki/D%C3%A9penses_publiques">12 million are under 15 and can't work, and 11 million are over 65 and presumably retired</a>. Of the remaining 43 million, 30 million are active, but only 24.3 million are actually in work - the other 5.7 million are looking for work, and presumably living largely on benefits. Finally, there are 13 million people of working age (15-64 years old) but inactive. They are probably also receiving a substantial amount in the form of state benefits.<br /><br />So, suppose that the French government decided to give every citizen an Unconditional Basic Revenue of say 500€ a month. The first thing that they could then do is subtract that from the Minimum State Pension (Minimum Veillesse) currently <a href="http://droit-finances.commentcamarche.net/faq/4958-montant-du-minimum-vieillesse-2014-aspa">800€ per month for a single person, and 1242€ for a couple</a>. That would mean those entitlements would drop to 300€ ans 242€ respectively, without changing anything.<br /><br />Secondly, the government could subtract the UBI value from any unemployment benefits. These vary depending on previous income,&nbsp; but the amount is&nbsp; currently <a href="http://www.dossierfamilial.com/allocations-de-chomage-combien-allez-vous-percevoir-1716.html">1029€ per month for someone who had been earning 1700€ a month, and 857€ per month for someone who had been on the minimum wage of 1050€ a month</a>. Again, all this could be done with no cost to the government, and no change for the citizen.<br /><br />Third, the government could eliminate completely the current system of child allowances (allocations familiales) - currently <a href="http://vosdroits.service-public.fr/particuliers/F13213.xhtml#N10142">165,72€ a month per child</a> (except that, strangely, the first child doesn't count), an amount that is increased by 64,67€ a month for children over 14. Currently, these amounts are not taxed, but it would be much simpler (and fairer) if each child received a fixed amount - say 500€ but possibly less - but that the amount was included in taxable income such that high earning households would effetively receive much less.<br /><br />There are no doubt other benefits that could be included and reduced with the introduction of the Unconditional Basic Income. The simplification of the system would already be a big advantage for citizens who currently have to navigate an extremely complex system. It would also mean that the administration costs could be seriously reduced. <br /><br />But here is where in gets interesting. What about those 6 million public sector workers? I see no reason why I could not simply have my salary reduced by €500 - after all, it doesn't matter to me whether I am being paid by the CNRS or via the UBI. Do the same thing for all public sector workers and you will have just reduced the government's salary bill by a substantial amount. Remember that 23.6% of all public sector spending goes on salaries. And since many public sector employees are on relatively low pay, this could make a huge difference.<br /><br />At the same time, the government could reduce the statutory minium wage by €500. It's currently <a href="http://www.journaldunet.com/management/remuneration/smic-mensuel-et-smic-horaire.shtml">1445€ for a 35 hour week.</a> This means that private sector companies would actually be able to pay their workers less - potentially only 945€ for a 35 hour week. This would directly increase the competitivity of French Industry, but reducing its costs. I presume that private sector employers would rapidly take advantage of the system to reduce their salary costs.<br /><br />But it would also mean that workers would be able to work far more flexibly - something that woudl be good for both employeres and employees. For example, a family of four with a guaranteed income of 2000€ a month would be able to chose if and when to work. If they can manage without paid employement at all, then that's fine. If one of the parents wants to work for 10 hours, 20 hours, 40 hours or more to earn enough to pay for that Flat Screen TV, a new sofa, replace the car, or pay for the family vacation, then that's fine too.<br /><br />We could scrap fixed working practises. But we could also scrap the idea of a fixed retirement age. People could effectively retire earlier if they want, and decide to devote all their time to voluntary work, or looking after their children and/or elderly relatives, thus reducing the pressure on massively overstretched resources.<br /><br />And yes, if people decided that they would prefer to move their families to remote rural areas, a grow their own vegetables, that's fine too. It would directly reduce the pressure on the overloaded services in our cities.&nbsp; <br /><br />Yes, it would mean that the 13 million people who currently are of working age but not active, would get a guaranteed income. But in many respects they already are no doubt already receiving a lot of support. The difference with the Unconditional Basic Income is that no-one would feel that they are a sponger, living off the system.<br /><br />Just to make things perfectly clear, let me just say that with 66 million people in France, it would cost just under €400 billion a year to give everyone a guaranteed Unconditional Basic Income of €500 a month.&nbsp; That compares with <a href="http://www.institutmontaigne.org/res/files/publications/efficacite_depense_publique_V2.pdf">a total government budget of €1151 billion in 2011.</a> Is it not concievable that transfering 36% of that budget to a UBI would make a lot of sense? <br /><br />It really does seem to me that this sort of reform can, and should, be implemented very rapidly. It makes very good sense for everyone. And yes, I really wouldn't object to having my CNRS salary cut! And after that, if we decide to finance the €400 billion with a tiny financial transaction tax instead of using VAT, Income Tax and Taxes on Business, then I think we will have made a lot of progress. Just a quick reminder - according to the BIS, transactions in France were <a href="http://simonthorpesideas.blogspot.fr/2014/10/bis-transaction-figures-for-2013-over-2.html">€260 trillion in 2013.</a> The €400 billion needed to finance a €500 a month UBI could therefore be paid for with an FTT of just 0.15%. François Hollande - are you listening? <br /><br /><br />Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com0tag:blogger.com,1999:blog-7530776363222965313.post-12295233327142650752014-12-27T11:19:00.000+01:002014-12-27T11:19:09.595+01:00More exchanges with an "Expert" in Banking and Finance<div class="tr_bq"> <style><!-- /* Font Definitions */ @font-face {font-family:Times; panose-1:2 0 5 0 0 0 0 0 0 0; mso-font-charset:0; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:3 0 0 0 1 0;} @font-face {font-family:"ＭＳ 明朝"; mso-font-charset:78; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-536870145 1791491579 18 0 131231 0;} @font-face {font-family:"Cambria Math"; panose-1:2 4 5 3 5 4 6 3 2 4; mso-font-charset:0; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-536870145 1107305727 0 0 415 0;} @font-face {font-family:Cambria; panose-1:2 4 5 3 5 4 6 3 2 4; mso-font-charset:0; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-536870145 1073743103 0 0 415 0;} @font-face {font-family:"Baoli SC Regular"; panose-1:2 1 8 0 4 1 1 1 1 1; mso-font-charset:0; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:3 135200768 0 0 262145 0;} /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-unhide:no; mso-style-qformat:yes; mso-style-parent:""; margin:0cm; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:Cambria; mso-ascii-font-family:Cambria; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:"ＭＳ 明朝"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Cambria; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:"Times New Roman"; mso-bidi-theme-font:minor-bidi; mso-ansi-language:EN-GB;} .MsoChpDefault {mso-style-type:export-only; mso-default-props:yes; font-family:Cambria; mso-ascii-font-family:Cambria; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:"ＭＳ 明朝"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Cambria; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:"Times New Roman"; mso-bidi-theme-font:minor-bidi; mso-ansi-language:EN-US;} @page WordSection1 {size:612.0pt 792.0pt; margin:70.85pt 70.85pt 70.85pt 70.85pt; mso-header-margin:36.0pt; mso-footer-margin:36.0pt; mso-paper-source:0;} div.WordSection1 {page:WordSection1;} --></style> </div><style><!-- /* Font Definitions */ @font-face {font-family:Arial; panose-1:2 11 6 4 2 2 2 2 2 4; mso-font-charset:0; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-536859905 -1073711037 9 0 511 0;} @font-face {font-family:"ＭＳ 明朝"; mso-font-charset:78; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-536870145 1791491579 18 0 131231 0;} @font-face {font-family:"Cambria Math"; panose-1:2 4 5 3 5 4 6 3 2 4; mso-font-charset:0; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-536870145 1107305727 0 0 415 0;} @font-face {font-family:Cambria; panose-1:2 4 5 3 5 4 6 3 2 4; mso-font-charset:0; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-536870145 1073743103 0 0 415 0;} @font-face {font-family:"Baoli SC Regular"; panose-1:2 1 8 0 4 1 1 1 1 1; mso-font-charset:0; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:3 135200768 0 0 262145 0;} /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-unhide:no; mso-style-qformat:yes; mso-style-parent:""; margin:0cm; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:Cambria; mso-ascii-font-family:Cambria; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:"ＭＳ 明朝"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Cambria; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:"Times New Roman"; mso-bidi-theme-font:minor-bidi; mso-ansi-language:EN-GB;} .MsoChpDefault {mso-style-type:export-only; mso-default-props:yes; font-family:Cambria; mso-ascii-font-family:Cambria; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:"ＭＳ 明朝"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Cambria; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:"Times New Roman"; mso-bidi-theme-font:minor-bidi; mso-ansi-language:EN-US;} @page WordSection1 {size:612.0pt 792.0pt; margin:70.85pt 70.85pt 70.85pt 70.85pt; mso-header-margin:36.0pt; mso-footer-margin:36.0pt; mso-paper-source:0;} div.WordSection1 {page:WordSection1;} --></style> <div class="MsoNormal"><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">I have already posted some of the comments on my blog and videos made by a very well placed representative of the international banking system during a fascinating email exchange that we had a few weeks ago - see <a href="http://simonthorpesideas.blogspot.fr/2014/12/at-last-real-expert-in-banking-and.html"><span style="color: blue;">"At last - a real expert in banking and finance reacts to my proposals!"</span></a></span></div><div class="MsoNormal"><br /></div><div class="MsoNormal"><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">I did actually reply to all those criticisms. And my comments actually led to quite a debate. In this posting I'll just give a few examples of the debate.</span></div><div class="MsoNormal"><br /></div><div class="MsoNormal"><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">For example, the first points the "expert" raised were these:</span></div><div class="MsoNormal"><br /></div><blockquote> <div class="MsoNormal"><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">[Expert] " </span><span lang="EN-US" style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: EN-US;">- Mr. Thorpe ignores that 100% of the money base is indeed already create by central banks. And that’s it.</span><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;"></span></div><div class="MsoNormal"><span lang="EN-US" style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: EN-US;">[Expert]- ‘Money’ (which loosely speaking is = N times the monetary base) is indeed ‘created’ by financial intermediaries (not only commercial &nbsp;banks as he said) but still (at least in normal times) the central bank controls (directly or indirectly) the money in circulation (typically by setting the interest rates.. actually one specific interest rate - the ‘repo’, or overnight - and trying to influence the long term ones)." </span></div></blockquote><div class="MsoNormal"><br /></div><div class="MsoNormal"><span lang="EN-US" style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: EN-US;">Clearly, the "expert" was trying to fob me off with the usual story that Central Banks control the amount of money in the economy using the "Multiplier Model", well known to economics students. Here's my first reply:</span></div><div class="MsoNormal"><br /></div><div class="MsoNormal"><br /></div><blockquote> <div class="MsoNormal"><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">I think that it is fair to say that this is now a subject where there are plenty of well-educated economists who would disagree with you very strongly.</span></div><div class="MsoNormal"><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">Take, for example, <a href="http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneyintro.pdf">a document published by the Bank of England last March.</a>&nbsp;</span></div><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">It states (for example):</span> </blockquote><blockquote> <span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">"</span><i><span lang="EN-US" style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: EN-US;"> “Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves… &nbsp;When a bank makes a loan to one of its customers it simply credits the customer’s account with a higher deposit balance. At that instant, new money is created…”</span></i> </blockquote><blockquote><div class="MsoNormal"><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;"></span></div><div class="MsoNormal"><i><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">"<b>Whenever a bank mades a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new money.</b></span></i><b><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;"> </span></b><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;"></span></div><div class="MsoNormal"><i><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">&nbsp;The reality of how money is created today differs from the description found in some economics textbooks: </span></i><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;"></span></div><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">·&nbsp;<i>Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits</i></span> </blockquote><blockquote> <i><span lang="EN-US" style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: EN-US;">"Broad money is made up of bank deposits - which are essentially IOUs from commercial banks and companies - and currency - mostly IOUs from the central banks. Of the two types of broad money, bank deposits make up the vast majority&nbsp; - 97% of the amount currently in circulation. <b>And in the modern economy, those bank deposits are mostly created by commercial banks themsleves.</b>"</span></i> </blockquote><blockquote><div class="MsoNormal"><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;"></span></div><i><span lang="EN-US" style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: EN-US;">"Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. <b>At that moment, new money is created."</b></span></i> </blockquote><blockquote><div class="MsoNormal"><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;"></span></div><i><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: EN-US;"><span style="mso-spacerun: yes;">&nbsp;</span><span lang="EN-US">“…the relationship between reserves and loans typically operates in the reverse way to that described in some economics textbooks. Banks first decide how much to lend depending on the profitable lending opportunities available to them…It is these lending decisions that determine how many bank deposits are created by the banking system. The amount of bank deposits in turn influences how much central bank money banks want to hold in reserve (to meet withdrawals by the public, make payments to other banks, or meet regulatory liquidity requirements), which is then, in normal times, supplied on demand by the Bank of England.”</span></span></i> </blockquote><blockquote><div class="MsoNormal"><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;"></span></div><div class="MsoNormal"><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">All very interesting, I hope you agree. In other words, you are presumably going to have to argue that the people at the Bank of England haven't a clue either – it's clearly not just me.</span></div></blockquote><div class="MsoNormal"><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">At this point, I suspect that our expert began to realize that maybe he was not up against the usual ill-informed member of the public for whom the "trust me, I'm an expert" gambit will almost certainly work.</span></div><div class="MsoNormal"><br /></div><div class="MsoNormal"><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">My friend Niko Kriegeskorte, another "brain scientist" chipped in with with a few other comments, with which our expert was apparently happy to agree.&nbsp;</span></div><blockquote> <div class="MsoNormal"><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">[NK] Simon’s specific ideas&nbsp; and X’s critcism (if we can look beyond ... sophistry and posturing) aside, i think the following points are well established:<br />·&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; private banks create money (in the form of deposits) when they make loans.</span></div><div class="MsoNormal"><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">[Expert] Yes, this is correct.<br /><br />[NK] · this is in contrast to the widely held misconception that each loan given uses money deposited by a bank’s other clients. however, it’s not controversial at all among experts on banking.<br /><br />[Expert] Yes, this is correct. That’s why it’s called ‘FIAT’ money (the one created by central banks) and that’s why it’s called ‘money multiplier’. It’s not a secret, it’s well known.<br /><br />[NK] ·&nbsp;&nbsp; money created in the form of deposits accounts for the vast majority of the money supply (97% according to one estimate).<br /><br />[Expert] Yes, this is correct although the exact % varies from country to country according to a large number of factors (which influence the multiplier)</span></div></blockquote><div class="MsoNormal"><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">Later on in the exchanges, Niko makes the following point</span></div><blockquote class="tr_bq"><div class="MsoNormal"><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">[NK] the larger issue is not the validity of Simon’s specific proposals (of which he has many), but whether a fundamental rethinking of the way our economy works, and in particular of the creation of money, is in order.</span></div><div class="MsoNormal"><br /></div><div class="MsoNormal"><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">[Expert] Well, economics is a very open science. These days you can come up with whatever, really whatever. There are people working on behavioural economics, people working on neuronomics, people working on you-name-it. The point is that we all (as in other sciences) agreed about some basic methodological aspects. We do not use rats but models. We don’t make experiments (at least not in macroeconomics) but simulations. <br /><br />If you want to challenge whether the money creation process (at least in the current form) is optimal or not (or it’s disaster), you’re welcome! However, as I already told you in a previous e-mail you have two options: 1) scream-what-ever-you-have-in-mind 2) play according to the rules of the game. <br /><br />Go for option 2. Sit down, write a small model and think about the economy. <br />In this world money is created by a central bank and is then transmitted to the private sector. <br />Write down the most basic model of this economy.<br />Then think what you don’t like (banks making money out of this? ok).<br />Write down a mickey-mouse model of the economy in which banks do *not* create money. Here you can be creative, you can choose (as I told you) to let private agents to borrow from the central bank. Or you can eliminate the central bank from the economy. Or what-ever..<br />Finally, try to understand what you want to maximise in each economy. Is it welfare? In this case, what is the loss-function you want to minimise? Also, what are the trade-offs of the agents in the model? What kind of insurance mechanisms you assume against idiosyncratic shocks? Feel free, you can say nothing here (in which case you live in autarky). What are the optimality conditions? What kind of frictions do you want to put in the model? Do you assume flex-prices (in this case monetary policy is irrelevant)? Or maybe sticky-prices? Etc…<br /><br />Once you have your 2 rats (the 2 economies), shock them (what ever the shock is… you can simulate a financial crisis… or a fiscal crisis… or a positive productivity shock… etc..) and see what happens in the model. <br /><br />Again, we are here to listen to good ideas. We are here to learn from good models. We are here to listen to science. <br /><br />However, we don’t talk to magicians or priests. We let them to the past millennium.</span></div></blockquote><div class="MsoNormal"><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">At this point, I came in with a recommendation for everyone to take a look at a very detailed state of the art economic simulation. </span></div><blockquote class="tr_bq"><div class="MsoNormal"><b><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR; mso-fareast-font-family: &quot;Times New Roman&quot;;">7 December 2014</span></b></div><div class="MsoNormal"><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">Dear Everyone,<br /><br />I&nbsp; would strongly recommend reading the paper by Jaromir Benes and Michael Kumhof from the IMF called "The Chicago Plan Revisited". It critically examines the proposal made by several prominent economists in the 1930s, notably Irving Fisher, to end fractional reserve banking and move to a 100% reserve system in which banks can only lend money that they actually have.<br /><br />You can download it here https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf<br /><br />Here's the abstract<br /><br />"At the height of the Great Depression a number of leading U.S. economist advanced a proposal for monetary reform that became known as the Chicago Plan. It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this plan: (1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money. (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt. (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation. We study these claims by embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. We find support for all four of Fisher's claims. Furthermore, output gains approach 10 percent, and steady state inflation can drop to zero without posing problems for the conduct of monetary policy."<br /><br />I presume that few people would want to argue that they used a mickey-mouse model here. Their paper is 70 pages long, is stuffed full of equations and, at least to a naive Brain Scientist, looks serious. But I'm ooking forward to hear [our expert's] critique.<br /><br />The text is full of interesting material. For example, when discussing the idea that central banks have can influence the amount of money creation by the commercial bank sector, the authors note that, "the </span><span style="font-family: &quot;Baoli SC Regular&quot;; font-size: 11.0pt; mso-ansi-language: FR; mso-bidi-font-family: &quot;Baoli SC Regular&quot;; mso-fareast-font-family: &quot;ＭＳ 明朝&quot;; mso-fareast-theme-font: minor-fareast;"></span><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">deposit multiplier</span><span style="font-family: &quot;Baoli SC Regular&quot;; font-size: 11.0pt; mso-ansi-language: FR; mso-bidi-font-family: &quot;Baoli SC Regular&quot;; mso-fareast-font-family: &quot;ＭＳ 明朝&quot;; mso-fareast-theme-font: minor-fareast;"></span><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;"> of the undergraduate economics textbook, where monetary aggregates are created at the initiative of the central bank, through an initial injection of high-powered money into the banking system that gets multiplied through bank lending... is simply, in the words of Kydland and Prescott (1990), a myth. And because of this, private banks are almost fully in control of the money creation process."<br /><br />For info, Kydland and Prescott's paper was published here<br />Kydland, F. and Prescott, E. (1990), </span><span style="font-family: &quot;Baoli SC Regular&quot;; font-size: 11.0pt; mso-ansi-language: FR; mso-bidi-font-family: &quot;Baoli SC Regular&quot;; mso-fareast-font-family: &quot;ＭＳ 明朝&quot;; mso-fareast-theme-font: minor-fareast;"></span><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">Business Cycles: Real Facts and a Monetary Myth</span><span style="font-family: &quot;Baoli SC Regular&quot;; font-size: 11.0pt; mso-ansi-language: FR; mso-bidi-font-family: &quot;Baoli SC Regular&quot;; mso-fareast-font-family: &quot;ＭＳ 明朝&quot;; mso-fareast-theme-font: minor-fareast;"></span><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">, Federal Reserve Bank of Minneapolis Quarterly Review, 14(2), 3-18<br /><br />It has been cited over 1000 times. You can download it here<br />http://dl1.cuni.cz/pluginfile.php/102856/mod_resource/content/0/8Kydlan_Prescott1990.pdf<br /><br />Best wishes<br /><br />Simon</span></div></blockquote><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">&nbsp;</span> <div class="MsoNormal"><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">It was at this point that our Expert trashed the paper by the two IMF economists - see <a href="http://simonthorpesideas.blogspot.fr/2014/12/at-last-real-expert-in-banking-and.html"><span style="color: blue;">the exchange in my previous post</span></a> (7 December). Amusingly, our expert suggested we read a paper called <a href="http://static.squarespace.com/static/515eaee9e4b0daad6e7d3fac/t/52dbc153e4b0a15b94a2b432/1390133587751/On+BenesKumhof+The+Chicago+Plan+Revisited+Jan+2014.pdf"><span style="color: blue;">"Many roads lead to Rome - not all by the shortest path. Comments and reflections on <i>The Chicago Plan Revisited</i>"</span></a>that supposedly refutes the Benes and Kumhoff study.&nbsp; It's very amusing that this paper was written by Joseph Huber. For those who don't know,&nbsp; Joseph Huber is a staunch opponent of the current money creation process, and one of the most prominent proponents of <a href="http://sovereignmoney.eu/"><span style="color: blue;">Sovereign Money Creation</span></a>, having written a classic paper on the idea of "<a href="http://www.soziologie.uni-halle.de/publikationen/pdf/9903.pdf"><span style="color: blue;">Plain Money" </span></a>in 1999 and also coauthor (with James Robertson) of the book <a href="http://www.soziologie.uni-halle.de/publikationen/pdf/9903.pdf"><span style="color: blue;">"Creating New Money - A monetary reform for the inormation age".&nbsp;</span></a></span></div><div class="MsoNormal"><br /></div><div class="MsoNormal"><span style="font-family: Arial; font-size: 11.0pt; mso-ansi-language: FR;">If the best rebuttal of the Chicago plan is the one by Joseph Huber, then the "Experts" defending the status quo are really in a bad way!</span></div><span style="font-size: small;"><span></span></span><span style="font-family: Times; font-size: 10.0pt; mso-ansi-language: FR;"></span> Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com0tag:blogger.com,1999:blog-7530776363222965313.post-5031818816903679572014-12-26T12:41:00.003+01:002014-12-27T09:34:26.432+01:00Why we have to change the systemMy obsession with the economy started just over four years ago, and my hundreds of pages of blog posts (<a href="https://www.dropbox.com/s/ude5jzyqcud1rm3/SavingTheWorld-2010-14.pdf">771 pages by last August!)</a> have all essentially been generated in my spare time. My day job is doing research on the Brain and Cognition - I'm currently the director of the <a href="http://www.cerco.ups-tlse.fr/">Brain and Cognition Research Center in Toulouse, France </a>- a lab with about 80 members. I also founded a company called <a href="http://www.spikenet-technology.com/">SpikeNet Technology</a> in 1999, a company that sells bio-inspired image recognition software.<br /><br />I've generally thought that my work on the Brain and Brain-style computing and my interest in the need to reform the economy as being very separate things. But, after watching a recent TED talk by a Jeremy Howard on <a href="https://www.youtube.com/watch?v=t4kyRyKyOpo">"The wonderful and terrigfying implications of computers that can learn"</a> I've just realized that the two areas are very much linked.<br /><br />I've been following the rapid progress in Computing, and our increasingly impressive ability to develop machines that can see, listen, read and write. In 2012, I was at a major Conference on Computer Vision where everyone was talking about how how a relatively simple feed-forward convolutional neural network had been trained to recognize and label millions of images. The team that won the "ImageNet" competition that year had set up a company called D<a href="http://www.wired.com/2013/03/google_hinton/">NNresearch which has since been bought up by Google</a>. And in the last couple of years, similar technology has been shown to exceed the performance of humans in a wide range of highly skilled tasks.<br /><br />As Jeremy Howard points out, this amazing progress has great potential. For example, it will be possible to provide intelligent medical diagnostic systems that will provide the skills needed to treat the billions of humans living in countries without sophisticated medical support.<br /><br />But, at the same time, Howard points out that <i>"Computers have just now... this month, become capable of replacing more than 80% of the worlds intellectual jobs."</i><br /><br />Yes, you read that correctly. Any hope that the majority of people will be able to earn enough money by getting an employer to pay them to do something is now almost completely finished.<br /><br />It was already the case the cashiers at supermarket checkouts were becoming a thing of the past - being replaced by automatic checkouts. And McDonalds will no doubt be able to buy machines capable of flipping hamburgers too. <br /><br />Sure, there will still be a few paid jobs around for the lucky few. But now, even skilled jobs like medical diagnostics, airport security and taxidriving will soon be done by machines for a fraction of the cost of employing real people to do things. Even simultaneous translation from English to Chinese can now be done without paying anyone to do it.<br /><br />We have to start thinking hard about how we can organise the world in the future - a world where there only enough paid jobs for a minority to survive. How are all the other people supposed to live? <br /><br />For me, the solution is clear. We need to introduce a Unconditional Basic Income for all. People should not be required to work as slaves to an insane financial system simply to be able to feed their families. There is plenty enough money in the system to finance such a scheme. Just impose a 0.1% Financial Transaction Tax on the tens of quadrillions of transactions going on every year, and you would have a fair way to redistribute money to ordinary citizens.<br /><br />And, when people are no longer slaves to the debt based money system, they will be free to do all the things that are really worth doing - creating worthwhile things, caring for each other, caring for our planet....<br /><br />Maybe 2015 is not going to be such a bad year after all.Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com0tag:blogger.com,1999:blog-7530776363222965313.post-49320184107536443182014-12-21T09:37:00.000+01:002014-12-26T09:25:22.973+01:00Is the idea of an Unconditional Basic Income starting to get traction? With Christmas just around the corner, it would be great to have something to give people hope.<br /><br />Well, one thing that might make a difference is the fact that, at last, the idea of an Unconditional Basic Income is starting to appear in mainstream press.<br /><br />Take, for example, an article called <a href="http://www.newsweek.com/2014/12/26/how-fix-poverty-write-every-family-basic-income-check-291583.html">"How to Fix Poverty: Write Every Family an Basic Income Check"</a> that just appeared in Newsweek magazine.&nbsp; The article starts with some sobering figures :&nbsp; <a href="https://www.census.gov/hhes/www/poverty/about/overview/" rel="nofollow" target="_blank">"almost 15 percent of citizens (and almost 20 percent of children) live in poverty</a>. Of those, <a href="http://www.brookings.edu/%7E/media/research/files/papers/2014/08/america%20poverty%20global%20context/how%20poor%20are%20americas%20poorest.pdf" rel="nofollow" target="_blank">slightly under 2 percent live on less than $2 per person per day</a>."<br /><br />The article then states that <i>"In 2012, the federal government spent <a href="http://www.socialsecurity.gov/oact/tr/2013/II_A_highlights.html" rel="nofollow" target="_blank">$786 billion on Social Security</a> and $94 billion on unemployment. Additionally, federal and state governments together spent <a href="http://www.cato.org/publications/policy-analysis/american-welfare-state-how-we-spend-nearly-%241-trillion-year-fighting-poverty-fail" rel="nofollow" target="_blank">$1 trillion on welfare</a> of the food stamp variety. Adding those costs together, that's $1.88 trillion."</i><br /><br /><i>"According to the U.S. Census Bureau, there are 115,227,000 households in the U.S. Split $1.88 trillion among all these households and each one gets $16,315.62. In other words, if you turned the welfare system into a $15,000 basic income payment, you’d end up saving over $150 billion (or $1,315.62 per American household)."</i><br /><br />Doesn't that just make obvious sense? And that's just using the money that the US government already spends on Social Security. Give everyone the payments as a basic entitlement, and there would no longer be the division that we currently have between the "scroungers" and "productive members of society".<br /><br />There was also a piece by Guy Standing, Professor of Development Studies at the School of Oriental and African Studies in London, that appeared in the Guardian called <a href="http://www.theguardian.com/business/economics-blog/2014/dec/18/incomes-scheme-transforms-lives-poor">"Basic income paid to the poor can transform lives"</a>. He describes three recent Unconditional Basic Income schemes that have been tested in India, with support from Unicef.&nbsp; The payments were modest cash payments - just one third of subsistence - paid individually, unconditionally, unversally and monthly - guaranteed as a right. 6000 men, women and children recieved the money, with the children's money going to the mother.<br /><br />The results look very promising, with positive effects in four different areas. <br /><ol><li><i>It had strong welfare, or “capability”, effects. There were improvements in child nutrition, child and adult health, schooling attendance and performance, sanitation, economic activity and earned incomes, and the socio-economic status of women, the elderly and the disabled.</i></li><li><i>It had strong equity effects. It resulted in bigger improvements ... for all vulnerable groups, notably those with disabilities and frailties. This was partly because the basic income was paid to each individual, strengthening their bargaining position in the household and community.</i></li><li><i>It had growth effects. Contrary to what sceptics predicted, the basic incomes resulted in more economic activity and work.</i> </li><li><i>It had emancipatory effects. The basic income resulted in some families buying themselves out of debt bondage, others paying down exorbitant debts incurring horrendous interest rates. For many, it provided liquidity with which to respond to shocks and hazards.</i></li></ol>So, all this is looking very encouraging. A Basic Unconditional Income for all really could transform our planet.<br /><br />Of course, one of the main arguments against such ideas is the question of how to find the money to make the payments. The Newsweek article rightly points out that you could finance a substantial Basic Income by simply redirecting existing welfare payments.<br /><br />But, in case you didn't know, I have an even simpler proposal. Just apply a very modest financial transaction tax on all electronic transactions. For example, a 0.1% tax on the €2 quadrillion of transactions in the Eurozone would provide around €6000 a year for every man, woman and child in the the region.<br /><br />There are lots of advantages of such a scheme - appart from eliminating poverty at a stroke. One of my favourites is that it allows debt based money to be laundered - converting it progressively into debt-free money that can be used freely.<br /><br />Note added 26th December : And here's <a href="http://www.huffingtonpost.com/mathew-schmid/unconditional-basic-income_b_6363970.html">a piece that came out in Huffington Post</a> too. Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com9tag:blogger.com,1999:blog-7530776363222965313.post-35750452810812364832014-12-14T13:11:00.000+01:002014-12-14T14:56:05.627+01:00At last - a real expert in banking and finance reacts to my proposals!My thanks to Niko Kriegeskorte, a Brain Scientist working in Cambridge, who kindly forwarded <a href="https://www.youtube.com/watch?v=P1gcd8CYEEU&amp;index=10&amp;list=UUBzcvWOt_GeQM8hldUZxuIQ">one of my Youtube videos</a> to a bunch of colleagues - including some economists - to ask them for comments. It was thus particularly interesting for me to find out what some of them think. The fact is that since I started thinking about the economy in 2010, I have made a very large number of suggestions. But I've had essentially no feedback from professionals whatsover. For example, when I invited myself to give <a href="http://simonthorpesideas.blogspot.fr/2012/03/my-talk-at-toulouse-school-of-economics.html">a talk at the Toulouse School of Economics in 2012</a>, the four people who turned up for my talk listened politely, but said nothing - except that it probably wouldn't work.<br /><br />So, here at last are the comments of one extremely well placed expert in the economy. (S)he said that I could put the comments on my blog, as long as I did not reveal their identity, or the organization for whom they work. But I can confirm that this is someone who works for a very significant internationally important organisation.<br /><br />First there is the original invitation, followed by four of the main replies that I got. I actually have a long list of points that I used in my replies that I could also post. But for the timebeing, I just wanted to give an idea of the sort of argumentation used by experts in banking and finance to defend the status quo. Enjoy.... <br /><h2><span style="font-size: large;"><span style="font-family: inherit;">30 November 2014</span></span></h2><i><span style="font-size: small;"><span style="font-family: inherit;">(Note : this is the original invitation sent by Niko - </span></span></i><span style="font-size: small;"><span style="font-family: inherit;"><i>it refers to my Youtube presentation that proposes that we should put an end to money creation in the Eurozone by commercial banks, and move that responsability to a public authority - essentially Positive Money's proposals, but at the level of the Eurozone)</i> </span></span><br /><br /><span style="font-family: inherit;">To: XXX<br />Subject: brain scientist on banking<br /><br />our colleague simon thorpe has been developing an interesting proposal for the european economy...<br />https://www.youtube.com/watch?v=P1gcd8CYEEU&amp;index=10&amp;list=UUBzcvWOt_GeQM8hldUZxuIQ<br /><br />any economists among us who could comment?</span><br /><style><!-- /* Font Definitions */ @font-face {font-family:"ＭＳ 明朝"; mso-font-charset:78; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-536870145 1791491579 18 0 131231 0;} @font-face {font-family:"ＭＳ 明朝"; mso-font-charset:78; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-536870145 1791491579 18 0 131231 0;} @font-face {font-family:Calibri; panose-1:2 15 5 2 2 2 4 3 2 4; mso-font-charset:0; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-520092929 1073786111 9 0 415 0;} @font-face {font-family:Cambria; panose-1:2 4 5 3 5 4 6 3 2 4; mso-font-charset:0; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-536870145 1073743103 0 0 415 0;} @font-face {font-family:Tahoma; panose-1:2 11 6 4 3 5 4 4 2 4; mso-font-charset:0; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-520082689 -1073717157 41 0 66047 0;} /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-unhide:no; mso-style-qformat:yes; mso-style-parent:""; margin:0cm; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:Cambria; mso-ascii-font-family:Cambria; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:"ＭＳ 明朝"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Cambria; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:"Times New Roman"; mso-bidi-theme-font:minor-bidi; mso-ansi-language:EN-US;} .MsoChpDefault {mso-style-type:export-only; mso-default-props:yes; font-family:Cambria; mso-ascii-font-family:Cambria; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:"ＭＳ 明朝"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Cambria; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:"Times New Roman"; mso-bidi-theme-font:minor-bidi; mso-ansi-language:EN-US;} @page WordSection1 {size:612.0pt 792.0pt; margin:70.85pt 70.85pt 70.85pt 70.85pt; mso-header-margin:36.0pt; mso-footer-margin:36.0pt; mso-paper-source:0;} div.WordSection1 {page:WordSection1;} --></style> <br /><h2 class="MsoNormal"><span style="font-size: large;"><span style="font-family: inherit;">03 December 2014 </span></span></h2><div class="MsoNormal"><i><span style="font-family: inherit;"><span style="font-size: 11pt;">( Note : this is the first reply that Niko got back from this well placed and knowledgeable specialist in banking and finance)</span></span></i></div><div class="MsoNormal"><span style="font-family: inherit;"><span style="font-size: 11pt;"><br /></span></span></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><span style="font-family: inherit;"><span style="font-size: 11pt;">I don’t know who the guy is but after checking on google scholar it seems he has more than 5k citations in his field. Quite an impressive achievement. As such, he would be much better off staying in his field without pretending to know something in economics.&nbsp;</span></span></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">The (ugly?) truth is that this guy ignores the very basic principles of monetary economics (on top of basic algebra.. like when he compares 1$ in year 1 with 1$ in year 20 pretending he’s talking about real quantities rather than nominal). In the video I think I lost count of the number of mistakes, some being so big that I came to the conclusion that he must have never open a single book of macro/monetary.&nbsp;</span></span></div><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">Let me give you one example. Let’s consider the very first slide (everything else being a direct consequence of this initial misunderstanding). The guy is arguing that the global financial crisis was generated by some issues in the way money is created (which, in turn might be true although in a completely different way with respect to what he thinks). In his opinion commercial banks create (from ’thin air’) 97% of the money supply which they then lend and charge an interest rate on it (by the way.. what about the remaining 3%? I guess it’s created by the aliens...). This constitutes an issue because, according to &nbsp;some (utterely wrong) back of the envelop calculations, the system would not allow private individuals and firms to pay back the debt. The solution according to Mr. Thorpe is to replace this system with an ‘interest-free money creation under the control of central banks and governments’.</span></span><br /><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">So, in no specific order:</span></span></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">- Mr. Thorpe ignores that 100% of the money base is indeed already create by central banks. And that’s it.</span></span></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><span style="font-family: inherit;"><span style="font-size: 11pt;">- ‘Money’ (which loosely speaking is = N times the monetary base) is indeed ‘created’ by financial intermediaries (not only commercial &nbsp;banks as he said) but still (at least in normal times) the central bank controls (directly or indirectly) the money in circulation (typically by setting the interest rates.. actually one specific interest rate - the ‘repo’, or overnight - and trying to influence the long term ones).</span></span></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><span style="font-family: inherit;"><span style="font-size: 11pt;">- Mr. Thorpe ignores that central banks (at least in serious countries) are independent (although they remain public entities) from governments and political power in general. The decision to guarantee independence to central banks is based on 200 years of research, by the way. The reason is to try to limit the incentive to monetise fiscal deficits generating high levels of inflation and discouraging some sort of fiscal discipline.&nbsp;</span></span></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><span style="font-family: inherit;"><span style="font-size: 11pt;">- Mr. Thorpe ignores (completely) what economists generally call ‘the transmission mechanism’, meaning the mechanism that indeed ‘transmits’ money created by the central bank to financial intermediaries (first) and private institutions (second). The mechanism is quite complicated (it’s generally split between a direct effect via money markets and inflation expectations and an indirect effect via the so called ‘uncovered interest parity’ and the exchange rate… but you can forget about this).</span></span></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><span style="font-family: inherit;"><span style="font-size: 11pt;">- Mr. Thorpe ignores that a zero-interest rate policy (btw, is he talking about *nominal* interest rates or *real*? and does he understand the difference? I guess he doesn’t) might not be optimal. Actually, it might generate the very kind of excess risk-taking behaviours he is pretending to solve.&nbsp;</span></span></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><span style="font-family: inherit;"><span style="font-size: 11pt;">- Mr. Thorpe ignores that what we call ‘money’ is an asset for anyone holding it, therefore it is a liability for someone else (clearly, for the central bank). Therefore, it is a ‘debt’ (just a special form of debt).</span></span></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><span style="font-family: inherit;"><span style="font-size: 11pt;">- Mr. Thorpe ignores the fundamental reason for charging an interest rate (that he perceives as a theft). If you’re curious why it is reasonable to charge an interest rate when lending &nbsp;some money, there are 2 basic reason: first, it’s risky (the borrower might default), second if agents are impatient (they prefer one egg today than the chicken tomorrow), then 1$ today is not 1$ tomorrow (which instead is worth **less**). Therefore you charge an interest rate in order to give up 1$ today against 1$+something tomorrow.</span></span></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><span style="font-family: inherit;"><span style="font-size: 11pt;">- If Mr. Thorpe is seriously interested in contributing to monetary economics he’s welcome. But he should avoid watching the widely known ‘non-sense videos’ youtube is full off.</span></span></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">I think I could go on for a couple of hours but I guess there is no need (right?). So I better stop here, given also the fact that the video gets worse and worse as the minutes go by.</span></span></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">So bottom line is the following: there is an interesting line of intersection between neuroscience and economics. It’s called ‘neuronomics’. One of the best theoretical economist in the world (Michael Woodford, New York University) has been carrying out some important research and the results are simply brilliant (btw, Woodford might get - as I wish - the Nobel prize at some point although for very different contributions). Here is one example:&nbsp;</span><span lang="EN-US" style="font-size: 11pt;"><a href="http://www.columbia.edu/~mw2230/DDMASSA.pdf">http://www.columbia.edu/~mw2230/DDMASSA.pdf</a></span><span style="font-size: 11pt;">&nbsp;&nbsp;Everything else, at least to me, seems a non-sense. Being very explicit: this guy should study first. Or maybe he should stay in his field where, once again, he seems to be quite successful.&nbsp;</span></span></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">For the rest you can sleep being relaxed. There is no international conspiracy against you or the private sector. I am not paid by some commercial banks to ‘prevent you to know the truth’ (as Mr. Thorpe argues..). Finally, I should stress that the debate about the origin of the crisis (btw, what crisis are we talking about? The financial crisis? The debt crisis of the Eurozone?) and the possible solutions is open. However, I guess we can’t really take seriously the opinion of some random guy that never solved a single problem set. At least in the field where he pretends to make a revolution.</span></span></div><div class="MsoNormal"><span style="font-family: inherit;"><br /></span> <style><!-- /* Font Definitions */ @font-face {font-family:"ＭＳ 明朝"; mso-font-charset:78; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-536870145 1791491579 18 0 131231 0;} @font-face {font-family:"Cambria Math"; panose-1:2 4 5 3 5 4 6 3 2 4; mso-font-charset:0; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-536870145 1107305727 0 0 415 0;} @font-face {font-family:Calibri; panose-1:2 15 5 2 2 2 4 3 2 4; mso-font-charset:0; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-520092929 1073786111 9 0 415 0;} @font-face {font-family:Cambria; panose-1:2 4 5 3 5 4 6 3 2 4; mso-font-charset:0; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-536870145 1073743103 0 0 415 0;} /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-unhide:no; mso-style-qformat:yes; mso-style-parent:""; margin:0cm; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:Cambria; mso-ascii-font-family:Cambria; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:"ＭＳ 明朝"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Cambria; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:"Times New Roman"; mso-bidi-theme-font:minor-bidi; mso-ansi-language:EN-US;} .MsoChpDefault {mso-style-type:export-only; mso-default-props:yes; font-family:Cambria; mso-ascii-font-family:Cambria; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:"ＭＳ 明朝"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Cambria; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:"Times New Roman"; mso-bidi-theme-font:minor-bidi; mso-ansi-language:EN-US;} @page WordSection1 {size:612.0pt 792.0pt; margin:70.85pt 70.85pt 70.85pt 70.85pt; mso-header-margin:36.0pt; mso-footer-margin:36.0pt; mso-paper-source:0;} div.WordSection1 {page:WordSection1;} --></style> </div><h2 class="MsoNormal"><span style="font-size: large;"><span style="font-family: inherit;">05 December 2014</span></span></h2><div class="MsoNormal"><i><span style="font-family: inherit;"><span style="font-size: 11pt;">( Note : this is the first mail that was addressed directly to me)</span></span></i></div><span style="font-family: inherit;"><span style="font-size: 11pt;">&nbsp;</span> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><span style="font-family: inherit;"><span style="font-size: 11pt;">Dear Simon,</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">I took a moment and I checked your blog. It reminded me a scene in a movie (this one: </span><span lang="EN-US" style="font-size: 11pt;"><a href="https://www.youtube.com/watch?v=xKpYBStDLVA">https://www.youtube.com/watch?v=xKpYBStDLVA</a></span><span style="font-size: 11pt;">). So let me be as honest as the young Ernesto Guevara. </span></span></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><span style="font-family: inherit;"><b><span style="font-size: 11pt;">Man, it’s a disaster. As such, you’d be much better off closing it. Clearly, this has nothing to do with your reputation in your field where – as you kindly reminded us – you’ve been extremely successful. </span></b></span></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><span style="font-family: inherit;"><span style="font-size: 11pt;">Now, unfortunately I don’t have the time to reply to all your points. So I will pick up the first one and pretend I replied to all of them (similar reasoning applies). You refer to this post (</span><span lang="EN-US" style="font-size: 11pt;"><a href="http://simonthorpesideas.blogspot.fr/2014/11/the-biggest-racket-in-history-how-banks.html">http://simonthorpesideas.blogspot.fr/2014/11/the-biggest-racket-in-history-how-banks.html</a></span><span style="font-size: 11pt;">) in which you say that the interest payments on the UK sovereign debt is ‘the biggest racket in history’. Here are my comments:</span></span></div><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">1)&nbsp;&nbsp;&nbsp; The most striking thing is that you really seem to ignore the difference between *nominal* interest rates and *real* interest rates.&nbsp; For this reason you assume that the high (nominal) rates in some periods was due to a ‘scam’ (quote: ‘the scam was most succesful in 1817 when they managed to extract over 10% of GDP in interest payments’). Oh, Key!! </span></span><br /><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><span style="font-family: inherit;"><span style="font-size: 11pt;">2)&nbsp;&nbsp;&nbsp; You completely ignore the difference between the fiscal side and the monetary side (the parallel for a Doctor would be to ignore the difference between the heart and the stomach). That’s why you put on the same level Bank loans and the public fiscal deficit (when talking about G. Osborne).</span></span></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><span style="font-family: inherit;"><span style="font-size: 11pt;">3)&nbsp;&nbsp;&nbsp; You assume that the interest payments are paid (from tax payers) to private banks only. Man, this is UTTERELY WRONG.</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">The answers to the three points are as follows:</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">1)&nbsp;&nbsp;&nbsp; Nominal rates are set as a function of two components: the output gap and inflation. In modern economies the central bank has typically a mandate (sometimes a dual mandate) as stated above. When real rates (btw, do you really understand the difference?... well actually, do you know the difference at all?) are too low (or possibly negative) we have observed an excessive risk-taking behavior which was – according to many experts (I’m not on this point) – one of the roots of the financial crisis. You should realize that asking for a zero nominal rate as you do implies asking for a negative real rate, which in turn would exacerbate the issue. Full stop.</span></span><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">2)&nbsp;&nbsp;&nbsp; Here I’m not even sure what you mean but I guess you say something like ‘if Banks can create money so the treasury should do the same!’. Technically, what you’re saying is simply to monetize the debt: the treasury issues debt and the central bank buys is by issuing new money (please note that this *saves* tax payers money by avoiding to reimburse interest payments.. typically on the web people say the opposite but – again – ‘there are only 2 infinite things, the universe the ignorance [A.E.]’).</span></span><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">3)&nbsp;&nbsp;&nbsp; This point is the funniest. Man, at some point (at the beginning of the 1990s) in Italy the public debt was hold almost exclusively (95%) by…. ehm… Italian households. So basically tax payers were transferring money to creditors, essentially to themselves. This also explains why nobody ever tried to stop the crazy debt accumulation. If you think Italy is a special case, you’d better think again (ask to your friends how many hold some treasury bills (in Italian ‘BOT’, ‘CCT’, etc..)). And if you think that holding the public debt of your own country is a good idea, you’d better think again (it’s called ‘international risk sharing’ and I wrote my PhD on this). Think about it, it’s not difficult at all.</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">Finally, let me tell you that the Bank of England document you are referring to is indeed right. Everything written on that document is right. The problem is not the document. The problem is your ideological bias (as for people claiming there is an ‘international spectre’ or ‘ international conspiracy’, etc..). For this reason, I do not pretend to change your mind, I’m sure you wouldn’t no matter how hard I could try (btw, is this really what we should expect from a scientist? To me looks like a case of Dunnin-Kruger effect). </span></span></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">In the meanwhile, I will read – with great pleasure – some of your great scientific contributions.</span></span></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><br /></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><span style="font-family: inherit;"><span style="font-size: 11pt;">Take care,</span></span></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><span style="font-family: inherit;"><span style="font-size: 11pt;">XXX</span></span></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><br /></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal"><span style="font-family: inherit;"><span style="font-size: 11pt;">P.S. Please feel free to put whatever on your blog. However, my name cannot be displayed since I would violate my contract (we cannot make any public statement). Thanks.</span></span></div><div class="MsoNormal"><span style="font-family: inherit;"><span style="font-size: 11pt;"> <style><!-- /* Font Definitions */ @font-face {font-family:"ＭＳ 明朝"; mso-font-charset:78; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-536870145 1791491579 18 0 131231 0;} @font-face {font-family:"Cambria Math"; panose-1:2 4 5 3 5 4 6 3 2 4; mso-font-charset:0; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-536870145 1107305727 0 0 415 0;} @font-face {font-family:Calibri; panose-1:2 15 5 2 2 2 4 3 2 4; mso-font-charset:0; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-520092929 1073786111 9 0 415 0;} @font-face {font-family:Cambria; panose-1:2 4 5 3 5 4 6 3 2 4; mso-font-charset:0; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-536870145 1073743103 0 0 415 0;} @font-face {font-family:"Helvetica Neue"; panose-1:2 0 5 3 0 0 0 2 0 4; mso-font-charset:0; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-452984065 1342208475 16 0 1 0;} /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-unhide:no; mso-style-qformat:yes; mso-style-parent:""; margin:0cm; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:Cambria; mso-ascii-font-family:Cambria; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:"ＭＳ 明朝"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Cambria; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:"Times New Roman"; mso-bidi-theme-font:minor-bidi; mso-ansi-language:EN-US;} .MsoChpDefault {mso-style-type:export-only; mso-default-props:yes; font-family:Cambria; mso-ascii-font-family:Cambria; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:"ＭＳ 明朝"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Cambria; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:"Times New Roman"; mso-bidi-theme-font:minor-bidi; mso-ansi-language:EN-US;} @page WordSection1 {size:612.0pt 792.0pt; margin:70.85pt 70.85pt 70.85pt 70.85pt; mso-header-margin:36.0pt; mso-footer-margin:36.0pt; mso-paper-source:0;} div.WordSection1 {page:WordSection1;} --></style> </span></span></div><h2 class="MsoNormal"><span style="font-size: large;"><span style="font-family: inherit;">7 December 2014 </span></span></h2><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><span style="font-family: inherit;"><i><span style="font-size: 11pt;">(Note : this is a reply to a mail where I strongly recommended reading </span><span style="font-size: 11pt;">the paper by Jaromir Benes and Michael</span><span style="font-size: 11pt;"> Kumhof from the IMF called "The Chicago Plan Revisited". It's a paper that critically</span></i></span> </div><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><span style="font-family: inherit;"><i><span style="font-size: 11pt;">examines the proposal made by several prominent economists in the 1930s,</span><span style="font-size: 11pt;"> notably Irving Fisher, to end fractional reserve banking and move to a 100% reserve system in which banks can only lend money that they actually</span><span style="font-size: 11pt;"> have).</span></i></span> </div><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><br /></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><span style="font-family: inherit;"><span style="font-size: 11pt;">Oh God,</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">You must be kidding (byt, now I understand some of the funny mistakes you made in your video.. they come from the fact you really did not understand the IMF paper!).&nbsp;</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">So let me recap: first you say that the system is obscure and that there is a some sort of secret that someone is not willing to reveal (because (s)he is paid not to..). THEN, in order to support your idea you quote.... ehm.... an IMF working paper talking about a Chicago proposal!!&nbsp;</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">Man, you're a great joker!&nbsp;</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">So, first of all let me remind you (given that you called me an 'hortodox economist') that the IMF is the kingdom of hortodoxy. Moreover, among academic schools, the Chicago school is notably the most extreme (right-wing) liberal (hortodox and neoclassical!) school.&nbsp;</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">Essentially, you've just shoot on your feet without knowing it. Well done.</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">In any case, about the proposal (as I mentioned earlier) I am not an expert (rather, I work on fiscal issues). However, the proposal has been dismissed for a large number of issues which the model you pointed at did not consider (any model has to simplify somehow the reality.. as such, before reaching consensus we typically require hundreds of models to be examined.. hundreds of rats need to die before we can say something for 'sure' and test it in the real world).&nbsp;</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">The criticisms to the Chicago proposal are publicly available (you can easily find dozens of papers). Some of them are more technical (like this one:&nbsp;<a href="http://www.uni-wh.de/fileadmin/media/w/w_i_wiwa/Money_Credit_Banking_Paper/1_b_Baeriswyl.pdf">http://www.uni-wh.de/fileadmin/media/w/w_i_wiwa/Money_Credit_Banking_Paper/1_b_Baeriswyl.pdf</a>), some of them are less technical (such as this one:&nbsp;<a href="http://static.squarespace.com/static/515eaee9e4b0daad6e7d3fac/t/52dbc153e4b0a15b94a2b432/1390133587751/On+BenesKumhof+The+Chicago+Plan+Revisited+Jan+2014.pdf">http://static.squarespace.com/static/515eaee9e4b0daad6e7d3fac/t/52dbc153e4b0a15b94a2b432/1390133587751/On+BenesKumhof+The+Chicago+Plan+Revisited+Jan+2014.pdf</a>), others are non technical at all (such as this one:&nbsp;<a href="http://ralphanomics.blogspot.com/2012/08/imf-authors-get-full-reserve-wrong.html">http://ralphanomics.blogspot.com/2012/08/imf-authors-get-full-reserve-wrong.html</a>).</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">Also, please note that under the Chicago proposal the money base would need to EXPLODE to sustain economic growth (in comparison QE would be like buying peanuts..). The technical implications of this measure are discussed in some of the papers you can find on-line.</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">Finally, let me also stress something that is driving me crazy. I guess that your confusion between NOMINAL and REAL interest rates comes from the fact that in the IMF model the **STEADY STATE** inflation is zero (in that case nominal and real rates coincide). If so man, you better think again. A zero **STEADY STATE** inflation rate does NOT imply a zero inflation rate in the world!!!!!!!&nbsp; This is just a simplifying assumption in models which is done to better see the consequence of a shock (you shock the model and they ask 'how inflation deviate from its natural level (which is POSITIVE)?). This point has also been discussed technically by this paper: <a href="https://www.ifw-kiel.de/ifw_members/publications/trend-inflation-taylor-principle-and-indeterminacy/kap1332.pdf">https://www.ifw-kiel.de/ifw_members/publications/trend-inflation-taylor-principle-and-indeterminacy/kap1332.pdf</a>.&nbsp;</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">Guys, I'm done. Really, I'm done.&nbsp; [...].</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">Take care,</span></span></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal"><span style="font-family: inherit;"><span style="font-size: 11pt;">XXX</span><span style="font-size: 11pt;"></span></span></div><span style="font-family: inherit;"> </span><br /><h3 class="MsoNormal"> <style><!-- /* Font Definitions */ @font-face {font-family:"ＭＳ 明朝"; mso-font-charset:78; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-536870145 1791491579 18 0 131231 0;} @font-face {font-family:"Cambria Math"; panose-1:2 4 5 3 5 4 6 3 2 4; mso-font-charset:0; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-536870145 1107305727 0 0 415 0;} @font-face {font-family:Calibri; panose-1:2 15 5 2 2 2 4 3 2 4; mso-font-charset:0; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-520092929 1073786111 9 0 415 0;} @font-face {font-family:Cambria; panose-1:2 4 5 3 5 4 6 3 2 4; mso-font-charset:0; mso-generic-font-family:auto; mso-font-pitch:variable; mso-font-signature:-536870145 1073743103 0 0 415 0;} /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-unhide:no; mso-style-qformat:yes; mso-style-parent:""; margin:0cm; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:Cambria; mso-ascii-font-family:Cambria; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:"ＭＳ 明朝"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Cambria; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:"Times New Roman"; mso-bidi-theme-font:minor-bidi; mso-ansi-language:EN-US;} .MsoChpDefault {mso-style-type:export-only; mso-default-props:yes; font-family:Cambria; mso-ascii-font-family:Cambria; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:"ＭＳ 明朝"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Cambria; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:"Times New Roman"; mso-bidi-theme-font:minor-bidi; mso-ansi-language:EN-US;} @page WordSection1 {size:612.0pt 792.0pt; margin:70.85pt 70.85pt 70.85pt 70.85pt; mso-header-margin:36.0pt; mso-footer-margin:36.0pt; mso-paper-source:0;} div.WordSection1 {page:WordSection1;} --></style> </h3><h2 class="MsoNormal"><span style="font-size: large;"><span style="font-family: inherit;">8 December 2014</span></span></h2><span style="font-family: inherit;"> </span><br /><h3 class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><span style="font-family: inherit;"><span style="font-size: 11pt;"></span></span></h3><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><span style="font-family: inherit;"><i><span style="font-size: 11pt;">(Note : This final message where our specialist was clearly getting more and more exasperated at having to explain to someone as stupid as me everything that I got wrong).</span><span style="font-size: 11pt;"></span></i></span></div><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><br /></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><span style="font-family: inherit;"><span style="font-size: 11pt;">Guys,&nbsp;</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">Now, I don't want to sound rude but I think I'm done. With respect, I think I have already spent too much time correcting your mistakes and wrong beliefs. It would take me another 3 hours to reply to all the mistakes that I read in the reply e-mails (such that the point about the ECB.. for your information <u>the ECB is buying government securities at an unprecedented pace.. so what the hell are &nbsp;you talking about???? </u>You don't even understand the difference between a policy mistake - the&nbsp;previous constrain of the ECB which was indeed true but not anymore at least on the secondary market - from a general rule which is not existent (!) since the FED, BoE, BoJ etc.. can buy whatever whenever and indeed they do so your statement as usual is just misinformed populism). As I specified earlier, I don't want to convince people that do not want to change mind on top of not having a clue.</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">Yes, I sound arrogant. And I am arrogant.&nbsp;</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">However, before saying good bye let me copy and paste some comments of Professors of Economics made on Facebook (you can check on my wall although I tagged some people copied here) when I shared Simon's video. Please note that I do not do this for any particular personal reason. I do this for you guys, so that you can understand what kind of reactions you can have by the people you call 'hortodox economists' (although they are really not). Again, it's for you hoping that you might reconsider the way you deal with econ issues.</span></span></div><span style="font-family: inherit;"> </span><br /><div class="MsoNormal" style="mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">- One Professor of Economics wrote: <b>"</b></span><b><span style="font-size: 11pt;">One thing is that the guy is a lunatic, the really scary thing is that a lot of people buy this nonsense... He sounds like a creationist mumbling his way against evolution"</span></b><span style="font-size: 11pt;">&nbsp;</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">- Another Professor wrote: <b>"This is absolute horseshit. If you have a society in which people are allowed to lend and borrow, debt will exist. Now banks, as we know them, have created a secondary market for this debt meaning that any creditor can pass on his credit already today,&nbsp;even if the debt will mature at some other time. However, by making this secondary market extremely liquid through bank guarantees (which are credible because of capital and reserve requirements), the debt effectively creates "money". But this is NOT out of "thin air". Banks are not Jesus. They turn illiquid assets into liquid, and that's it. Wtf is wrong with people?"</b>&nbsp;</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">I guess the reply is that they 'defend the system' in which Banks create money 'out of thin air'.. or that 'M0 outside the UK is really obscure' (when in fact, it's absolutely transparent) and so on. If you want to continue thinking that you are right fine with me. You are right, you are the good guys that act for the people, we are the bad guys defending the system and 'protecting' the bankers (<b><u>despite the fact that hundreds of Banks in the US fail each year</u></b>.. yes, each year:&nbsp;<a href="http://www.online-stock-trading-guide.com/2010-us-bank-failures.html">http://www.online-stock-trading-guide.com/2010-us-bank-failures.html</a>).</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">I tried to tell you the ugly truth before: your blog - unfortunately - together with your videos are a non-sense. As such, you should close them and re-start from zero. But it's your name and your reputation so you know better than me. The good news is that in your field you are an excellent scientist, you should be glad of your success (something I guess I will never reach in my lifetime in my field).</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">Guys, if you want to understand monetary economics go to the faculty of economics and sit for undergrad courses. Do not pretend you understand econ because you watch a youtube video or read something somewhere on the web. Otherwise you will always make the same mistakes and it will be useless trying to make you update your beliefs. I've always been a terrible teacher (that's why I choose policy against academia) and I am arrogant so I guess I am really not the person you want to talk to.</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">But again, it's me. I am arrogant (which is indeed true) and I defend the current system in which Banks create money 'out of thin air' and make a lot of profit on the shoulders of tax payers (which is just a populist statement).&nbsp;</span></span><br /><br /><span style="font-family: inherit;"><span style="font-size: 11pt;">Take care and if you publish a paper let me know, I'll read it with pleasure.</span></span></div>Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com0tag:blogger.com,1999:blog-7530776363222965313.post-29923558244990409792014-11-30T09:52:00.000+01:002014-11-30T09:52:19.745+01:00Yann Moulier-Boutang : Another person who has proposed replacing existing taxes by a financial transaction taxMy TEDx talk in French (<a href="https://www.youtube.com/watch?v=jSEiMVQAIY4">"Vers un monde (pratiquement) sans taxes"</a>) which proposes that we could effectively scrap the existing tax system, and replace virtually all existing taxes by a single, universal, tax on financial transactions has been making a bit of progress. <br /><br />It's been posted on one site called "<a href="http://mrmondialisation.org/simon-thorpe-vers-un-monde-pratiquement-sans-taxes/">Mr Mondialisation"</a> and on another called <a href="http://www.agoravox.tv/tribune-libre/article/vers-un-monde-pratiquement-sans-47788">"Agoravox.tv"</a>.<br /><br />The first one actually generated a comment that included a link to a guy called Yann Moulier-Boutang, an economist at the Université de Compeigne, north of Paris, who it turns out has also been pushing for similar sorts of ideas to my own. It's nice to know that I'm not the only person who can see the advantages of remplacing the current tax system. Like me, he also thinks that it makes sense to link a tax on financial transactions with an Unconditional Basic Income.<br /><br />There is an interview with him in French in the magazine Telerama back in 2011 called&nbsp; <a href="http://www.telerama.fr/idees/yann-moulier-boutang-taxons-toutes-les-transactions-financieres,72654.php">"Taxons toutes les transactions financières!"</a> . It takes up some ideas that he presented in his book <a href="http://www.amazon.fr/Labeille-l%C3%A9conomiste-Yann-Moulier-Boutang/dp/2355360308">"L'abeille et l'economiste"</a> in which he argues that we should be encouraging non remunerated work - work that he thinks of as a sort of "pollination". Like bees, when they pollinate flowers, there are many people who do useful things, but don't get directly paid for what they do.<br /><br />Here's some of what he says in the interview (my translation - with some help from Google!).<br /><br /><span class="hps"></span> <b><span class="hps">What should we do?</span></b><br /><span class="" id="result_box" lang="en"> <span class="hps">Tax all</span> <span class="hps">financial transactions</span><span>!</span> <span class="hps">... [The tax]</span><span></span> <span class="hps">would collect</span> <span class="hps">2%</span> <span class="hps">on all transactions</span><span>,</span> from cashpoint<span class="hps"> withdrawal</span>s to <span class="hps">the purchase</span> <span class="hps">of shares -</span> <span class="hps">and not just</span> <span class="hps">on transactions between</span> <span class="hps">countries</span> <span class="hps">as proposed by</span> <span class="hps">the Tobin tax.</span> <span class="hps">Imagine</span><span>: 2%</span> <span class="hps">on</span> <span class="hps">3700</span> <span class="hps">billion</span> <span class="hps">derivatives that</span> <span class="hps">have made the fortune</span> <span class="hps">of the Stock Exchange,</span> <span class="hps">Soros</span><span>,</span> <span class="hps">Exxon</span><span>,</span> <span class="hps">pension funds</span><span>!</span> <span class="hps">Not only will</span> <span class="hps">you solve</span> <span class="hps">the problem of</span> <span class="hps">debt, but</span> <span class="hps">you allow</span> <span class="hps">the normal</span> <span class="hps">functioning of the state</span> <span class="hps">by removing</span> <span class="hps">VAT and</span> <span class="hps">income tax</span><span>!</span><br /><br /><b>But at <span class="hps"></span><span class="hps">the same time you remove the</span> <span class="hps">progressive nature of tax</span>ation <span class="hps">...</span></b><br /> <span class="hps">In a democratic society</span><span class="">, everyone</span> <span class="hps">must contribute</span> <span class="hps">proportionately.</span> <span class="hps">You know very well</span> <span class="hps">that if </span>you decide to exempt <span class="hps">the poor</span> <span class="hps">from paying income tax</span><span class="hps">,</span> <span class="hps">the rich</span> will accuse&nbsp; them <span class="hps">of being scroungers</span><span>.</span> <span class="hps">Second advantage</span><span>:</span> <span class="hps">you say</span> <span class="hps">to the banks</span><span class=""> that, since you have been gorging yourselves</span><span class="hps"> on</span> <span class="hps">financial transactions</span><span>, well</span> <span class="hps">you will</span> <span class="hps">now</span> <span class="hps">play a</span> <span class="hps">civic role</span> <span class="hps">and</span> <span class="hps">you will no longer be accused</span> <span class="hps">of just being</span> <span class="hps"></span> <span class="hps">speculators.</span> <span class="hps">And there will thus be</span> <span class="hps">a real budget for </span><span class="hps">research</span><span>, a real</span> <span class="hps">social budget</span><span class="">, a real</span> <span class="hps">education budget</span> <span class="hps">...</span><br /><br /> <span class="hps">I think that we will end up with such a system. Just as we will have to accept a</span><span class="hps"></span> <span class="hps">reform of social</span> <span class="hps">protection, which</span> is collapsing <span class="hps">because the number</span> <span class="hps">of people in paid </span><span class="hps">employment</span> <span class="hps">is decreasing.</span> <span class="hps">The only way to</span> <span class="hps">remedy</span> <span class="hps">this</span> <span class="hps">is to consider</span> <span class="hps">that everyone</span> <span class="hps">is involved in "</span><span class="hps">pollination"</span> and so should<span class="hps"></span> <span class="hps">qualify for</span> <span class="hps atn">a "</span><span>basic income</span><span>"</span><span>, not very</span> <span class="hps">far from the</span> <span class="hps">minimum wage</span><span>.</span><br /><br /> <b><span class="hps">You</span> <span class="hps">do not talk about</span> <span class="hps">redistribution</span> <span class="hps">but</span> rather <span class="hps">paying for "</span><span class="hps">pollination</span> <span class="hps">..."</span></b><br /> <span class="hps">Yes,</span> <span class="hps">it is important to</span> <span class="hps">value the</span> <span class="hps">people</span> that we tend to treat as "cicadas", despite the fact that they are the "<span class="hps">bees".</span> <span class="hps atn">The "</span><span>basic income</span><span>" would not</span> <span class="hps">take</span> <span class="hps">money</span> <span class="hps">from the pockets of</span> <span class="hps">working</span> <span class="hps">ants</span> <span class="hps">and give it to</span> <span class="hps">people who</span> <span class="hps">do nothing to help buil</span><span class="hps"> the</span> <span class="hps">anthill.</span> <span class="hps">Today in France</span><span>,</span> <span class="hps">the only</span><span class="hps"> sort of "pollination" that&nbsp;</span> <span class="hps">is officially recognized is</span> <span class="hps">the status of</span> <span class="hps">people in performing arts ("<i>intermittants de spectacle"</i>)</span><span>.</span> <span class="hps">In Brazil,</span> <span class="hps">Lula</span> <span class="hps">gave</span> <span class="hps">a monthly</span> <span class="hps">income to</span> <span class="hps">families</span> <span class="hps">with no other</span> <span class="hps">condition than that they send</span> <span class="hps">their children</span> <span class="hps">to school</span><span>,&nbsp; a move that&nbsp;</span><span class="hps"> lifted millions</span> <span class="hps">of Brazilians</span> <span class="hps">out of poverty.</span><span></span><br /><br /> <b><span class="hps">Your</span> <span class="hps">tax system</span> <span class="hps">can not operate at</span> <span class="hps">the scale of a</span> <span class="hps">country ...</span></b><br /> <span class="hps">Europe has</span> <span class="hps">the world's largest</span> <span class="hps">market in terms of</span> <span class="hps">production, imports</span><span>, exports,</span> <span class="hps">heritage,</span> <span class="hps">tourism ...</span> <span class="hps">so let's start with</span> <span class="hps">Europe!</span> <span class="hps">We</span><span>'ll only make progress with </span><span class="hps"></span> <span class="hps">a federal</span> <span class="hps">vision [...] </span><span class="hps">Set up</span> <span class="hps">this</span> <span class="hps">transaction tax</span><span>, gradually</span> <span class="hps">decreasing the weight</span> <span class="hps">of internal</span> <span class="hps">taxes ...</span><br /><b><br /> <span class="hps">Your</span> <span class="hps">tax sound like </span><span class="hps">a utopia</span><span>?</span></b><br /> <span class="hps">When such ideas are</span><span class="hps"> taken up by</span> <span class="hps">a lot</span> <span class="hps">of politicians</span> <span class="hps">including ministers</span> <span class="hps">of Economy</span> <span class="hps">and Finance,</span> <span class="hps">I tend to</span> <span class="hps">think that we are no longer talking about a </span><span class="hps">utopia [...]</span><span class="hps"></span><span>.</span> <span class="hps">I think</span> <span class="hps">instead</span> <span class="hps">that we are talking about a short-term </span><span class="hps">future</span> <span class="hps">that</span> <span class="hps">many people</span> <span class="hps">simply</span> <span class="hps">have not seen</span> <span class="hps">emerging.</span> <span class="hps">The right-wing </span><span class="hps">is stuck with</span> <span class="hps">the idea of</span> <span class="hps">tinkering with the</span> <span class="hps">machine and</span> will <span class="hps">do</span> virtually <span class="hps">nothing</span> that is radical<span class="hps"></span><span>;</span> <span class="hps">the left</span>-wing <span class="hps">simply proposes</span> <span class="hps">to use </span><span class="hps">the current structure</span><span>, obviously un</span><span class="hps">satisfactory,</span> <span class="hps">based on </span><span class="hps">income tax</span><span>.</span> <span class="hps">But what</span> <span class="hps">of VAT,</span> <span class="hps">and resources</span> needed for <span class="hps">the</span> <span class="hps">green revolution</span> <span class="hps">and&nbsp; improvements</span> <span class="hps">in social protection</span><span>?</span><br /><br /> <b><span class="hps">You know</span> <span class="hps">that giving up</span> <span class="hps">a progressive</span> <span class="hps">tax levy,</span> <span class="hps">from the perspective</span> <span class="hps">of the Socialists,</span> <span class="hps">is not</span> <span class="hps">acceptable?</span></b><br /> <span class="hps">That's</span> <span class="hps">ideology.</span> <span class="hps">Socialists</span> <span class="hps">know that</span> <span class="hps">if we want to</span> <span class="hps">maintain and enhance</span> <span class="hps">a high level of</span> <span class="hps">social protection</span> <span class="hps">while continuing to</span> <span class="hps">exempt&nbsp;</span> <span class="hps">half the </span><span class="hps">households</span><span> </span></span><span class="" id="result_box" lang="en"><span><span class="" id="result_box" lang="en"><span class="hps">from</span> <span class="hps">income tax</span></span>, it</span> <span class="hps">is not enough to simply increase taxes on </span><span class="hps"></span><span class="hps">the very rich.</span> <span class="hps"></span><span class="hps">We have the</span> <span class="hps">right to</span> be on the <span class="hps">left-wing and</span> <span class="hps">yet say that</span> <span class="hps">this will not</span> <span class="hps">allow us to both</span><span class="hps"> provide income to the poorest people and propose </span><span class="hps">ambitious policies.</span></span>Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com0tag:blogger.com,1999:blog-7530776363222965313.post-26116064982683805782014-11-29T12:19:00.000+01:002014-11-29T14:34:22.378+01:00Money Creation and Society - the transcription - Part 2<h5 align="left"><i><b><span style="font-weight: normal;"><span style="font-size: small;">(Note : Part 1 of the debate is <a href="http://simonthorpesideas.blogspot.fr/2014/11/money-creation-and-society.html">here</a>, and there is a more general post about <a href="http://simonthorpesideas.blogspot.fr/2014/11/money-creation-and-society-invisible.html">the lack of coverage of this historic debate here</a>)</span></span></b></i> </h5><h5 align="left">12.13 pm</h5><a class="anchor" href="https://www.blogger.com/null" name="st_o256"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000211"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew41"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000393"></a><b><b>Mr Peter Lilley</b> (Hitchin and Harpenden) (Con):</b> It is a pleasure, as always, to follow the right hon. Member for Oldham West and Royton (Mr Meacher), who gave us a characteristically thoughtful and radical speech. I do not necessarily start from the same premises as him, but what he says is an important contribution to the debate, on the securing of which I credit my hon. Friend the Member for Wycombe (Steve Baker). He has done the House and the country a service by forcing us to focus on the issue of where money comes from and what banks do. He did so in an insightful way.<br /><br />Above all, he showed that he sees, as our old universities used to see, economics as a branch of moral sciences. It is not just a narrow, analytical, economic issue, but a moral, philosophical and ultimately a theological issue, which he illuminated well for the House.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o91"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para34"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000212"></a>A lot has been made of the ignorance of Members of Parliament of how money is created. I suspect that that ignorance, not just in Members of Parliament but in the intellectual elite in this country, explains many things, not least why we entered the financial crisis with a regulatory system that was so unprepared for a banking crisis. I suspect that it is because people have not reflected on why banks are so different from all other capitalist companies. They are different in three crucial respects, which is why they need a very different regulatory system from normal companies.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o92"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para35"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000213"></a>First, all bankers—not just rogue bankers but even the best, the most honourable and the most honest—do things that would land the rest of us in jail. Near my house in France is a large grain silo. After the harvest, farmers deposit grain in it. The silo gives them a certificate for every tonne of grain that they deposit. They can withdraw that amount of grain whenever they want by presenting that certificate. If the silo owner issued more certificates than there was grain kept in his silo, he would go to jail, but that is effectively what bankers do. They keep as reserves only a fraction of the money deposited with them, which is why we call the system the fractional reserve banking system. Murray Rothbard, a much neglected Austrian economist in this country, said very flatly that banking is therefore fraud: fractional reserve banking is fraud; it should be outlawed; banks should be required to keep 100% reserves against the money they lend out. I reject that conclusion, because there is a value in what banks do in transforming short-term savings into long-term investments. That is socially valuable and that is the function banks serve.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o93"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para36"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000214"></a>We should recognise the second distinctive feature of banks that arises directly from the fact that they have only a fraction of the reserves against the loans they make: banks, individually and collectively, are intrinsically unstable. They are unstable because they borrow short and lend long. I have been constantly amazed throughout the financial crisis to hear intelligent people say that the problem with Northern Rock, RBS or HBOS, or with the German, French, Greek and other banks that ran into problems, was the result of their borrowing short and lending long, and they should not have been doing it, as if it was a deviation from their normal role. Of course banks borrow short and lend long. That is what banks do. That is what they are there for. If they had not done that they would not be banks. Banking works so long as too many depositors do not try to withdraw their funds simultaneously. However, if depositors, retail or wholesale, withdraw or refuse to renew their short-term deposits, a bank will fail.&nbsp; <br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o94"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para37"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000215"></a>If normal companies fail, there is no need for the Government to intervene. Their assets will be redeployed in a more profitable use or taken over by a better-managed company. But if one bank fails, depositors are likely to withdraw deposits from other banks, about which there may also be doubts. A bank facing a run, whether or not initially justified, would be forced to call in loans or sell collateral, causing asset prices to fall, thereby undermining the solvency of other banks. So the failure of one bank may lead to the collapse of the whole banking system.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o95"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para38"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000216"></a>The third distinctive feature of banks was highlighted by my hon. Friend the Member for Wycombe: banks create money. The vast majority of money consists of bank deposits. <b>If a bank lends a company £10 million, it does not need to go and borrow that money from a saver; it simply creates an extra £10 million by electronically crediting the company’s bank account with that sum. It creates £10 million out of thin air.</b> By contrast, when a bank loan is repaid, that extinguishes money; it disappears into thin air. The total money supply increases when banks create new loans faster than old loans are repaid. That is where growth in the money supply usually comes from, and it is the normal situation in a growing economy. Ideally, credit should expand so that the supply of money grows sufficiently rapidly to finance growth in economic activity. When a bank or banks collapse, they will call in loans, which will reduce the money supply, which in turn will cause a contraction of activity throughout the economy.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o96"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para39"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000217"></a>In that respect, banks are totally different from other companies—even companies that also lend things. If a car rental company collapses, it does not lead to a reduction in the number of cars available in the economy. Its stock of cars can be sold off to other rental companies or to individuals. Nor does the collapse of one rental company weaken the position of other car rental companies; on the contrary, they then face less competition, which should strengthen their margins.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o97"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para40"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000218"></a>The collapse of a car rental company has no systemic implications, whereas the collapse of a bank can pull down the whole banking system and plunge the economy into recession. That is why we need a special regulatory regime for banks and, above all, a lender of last resort to pump in money if there is a run on the banks or a credit crunch, yet this was barely discussed when the new regulatory structure of our financial and banking system was set up in 1998. The focus then was on consumer protection issues. Systemic stability and the lender-of-last-resort function were scarcely mentioned. That is why the UK was so unprepared when the credit crunch struck in 2007. Nor were these aspects properly considered when the euro was set up. As a result, a currency and a banking system were established without the new central bank being given the power to act as lender of last resort. It has had to usurp that power, more or less illegally, but that is its own problem.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o98"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para41"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000219"></a>This analysis is not one of those insights that come from hindsight. Some while ago, Michael Howard, now the noble Lord Howard, reminded Parliament—and<b> </b>indeed me; I had completely forgotten—that I was shadow Chancellor when the Bill that became the Bank of England Act 1998 was introduced. He pointed out that I then warned the House that<br /><a class="anchor noCont" href="https://www.blogger.com/null" name="141120-0002.htm_brev3"></a><a class="anchor noCont" href="https://www.blogger.com/null" name="14112048000261"></a><br /><div class="tabletext"><i>“With the removal of banking control to the Financial Services Authority…it is difficult to see how…the Bank remains, as it surely must, responsible for ensuring the liquidity of the banking system and preventing systemic collapse.”</i></div><a class="anchor" href="https://www.blogger.com/null" name="stpa_o99"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para42"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000220"></a>And so it turned out. I added:<br /><a class="anchor noCont" href="https://www.blogger.com/null" name="141120-0002.htm_brev4"></a><a class="anchor noCont" href="https://www.blogger.com/null" name="14112048000262"></a><br /><div class="tabletext"><i>“setting up the FSA may cause regulators to take their eye off the ball, while spivs and crooks have a field day.”</i>—[<i>Official Report</i>, 11 November 1997; Vol. 300, c. 731-32.]</div><a class="anchor" href="https://www.blogger.com/null" name="stpa_o100"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para43"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000221"></a>So that turned out, too. I could foresee that, because the problem was not deregulation, but the regulatory confusion and the proliferation of regulation introduced by the former Chancellor, which resulted from a failure to focus on the banking system’s inherent instability, and to provide for its stability.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o101"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para44"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000222"></a>This failure to focus on the fundamentals was not a peculiarly British thing. The EU made the same mistakes in spades when setting up the euro, and at the very apogee of the world financial system, they deluded themselves that instability was a thing of the past. In its “Global Financial Stability Report” of April 2006, less than 18 months before the crisis erupted, the International Monetary Fund, no less, said:<br /><a class="anchor noCont" href="https://www.blogger.com/null" name="141120-0002.htm_brev5"></a><a class="anchor noCont" href="https://www.blogger.com/null" name="14112048000263"></a><br /><div class="tabletext"><i>“There is growing recognition that the dispersion of credit risk by banks to a broader and more diverse group of investors, rather than warehousing such risk on their balance sheets, has helped to make the banking and overall financial system more resilient…The improved resilience may be seen in fewer bank failures and more consistent credit provision. Consequently, the commercial banks…may be less vulnerable today to credit or economic shocks.”</i><br /></div><a class="anchor" href="https://www.blogger.com/null" name="stpa_o102"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para45"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000223"></a>The supreme irony is that those at the pinnacle of the world regulatory system believed that the very complex derivatives that contributed to the collapse of the financial system would render it immune to such instability. We need constantly to be aware that banks are unstable, and are the source of money. If instability leads to a crash, that leads to a contraction in the money supply, and that can exacerbate and intensify a recession.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o257"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000224"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew42"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000394"></a><b><b>Bob Stewart</b> (Beckenham) (Con):</b> I am listening carefully to my right hon. Friend. Does that mean that the banks are uncontrollable, as things stand?<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o258"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000225"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew43"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000395"></a><b>Mr Lilley:</b> No; they can and should be controlled. They are controlled both by being required to have assets, and ultimately by the measures that Government should take to ensure that they do not expand lending too rapidly. That is the point that I want to come on to, because a failure to focus on the nature of banking and money creation causes confusion about the causes of inflation and the role of quantitative easing.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o103"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para46"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000226"></a>As too many people do not understand where money comes from, there is confusion about quantitative easing. To some extent, the monetarists, of whom I am one, are responsible for that confusion. For most of our lifetime, the basic economic problem has been inflation. There have been great debates about its causes. Ultimately, those debates were won by the monetarists. They said, “Inflation is caused by too much money—by money growing more rapidly than output. If that happens, inevitably and inexorably, prices will rise.” The trouble was that all too often, monetarists used the shorthand phrase, “Inflation is caused by Government printing too much money.” In fact, it is caused not by Government printing the money, but by banks lending money and then creating new money at too great a rate for the needs of the economy. We should have said, “Inflation follows when Governments allow or encourage banks to create money too rapidly.” The inflationary problem was not who created the money, but the fact that too much money was created.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o104"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para47"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000227"></a>The banks are now not lending enough to create enough money to finance the growth and expansion of the economy that we need. That is why the central bank steps in with quantitative easing, which is often described as the bank printing money. Those who have been brought up to believe that printing money was what caused inflation think that quantitative easing must, by definition, cause inflation. It only causes inflation if there is too much of it—if we create too much money at a faster rate than the growth of output, and therefore drive up prices—but that is not the situation at present.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o259"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000228"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew44"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000396"></a><b>Mr MacNeil:</b> The right hon. Gentleman is giving a very good explanation of the different circumstances in which money is created. He has spoken about the morality, and about quantitative easing. When there is demand, what is his view of the theory of helicopter money, and where that money gets spread to?<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o260"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000229"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew45"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000397"></a><b>Mr Lilley:</b> As a disciple of Milton Friedman, I am rather attracted to the idea of helicopter money; I think it was he who introduced the metaphor, and said that it would be just as effective if money were sprayed by a helicopter as if it were created by banks. Hopefully, as I live quite near the helicopter route to Battersea, I would be a principal recipient. I do not think that there is a mechanism available that would allow us to do that, but I am not averse to that in principle, if someone could do it. My point is that the banks, either spontaneously or encouraged by the central bank through quantitative easing, must generate enough money to ensure that the economy can grow steadily and stably.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o261"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000230"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew46"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000398"></a><b>Mr MacNeil:</b> Could it not be argued that increasing welfare payments would be a form of helicopter money, because the people most likely to spend money are those with very little money? If we put money in the pockets of those who have little money, it would be very positive, because of the economic multiplier; the money would be spent, and would circulate, very quickly.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o262"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000231"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew47"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000399"></a><b>Mr Lilley:</b> There are far better reasons for giving money to poor people than because their money will circulate more rapidly—and there is no evidence for that; I invite the hon. Gentleman to read Milton Friedman’s “A Theory of the Consumption Function”, which showed that that is all nonsense. There are good reasons for giving money to poor people, namely that they are poor and need money. Whether the money should be injected by the Government spending more than they are raising, rather than by the central bank expanding its balance sheet, is a moot point.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o105"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para48"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000232"></a>All I want to argue today is that we should recognise that the economy is as much threatened by a shortage of money as it is by an excess of money. For most of our lifetimes the problem has been an excess, but now it is a shortage. We therefore need to balance in either occasion<b> </b>the rate of growth of money with the rate of growth of output if we are to have stability of prices and stable economic activity. I congratulate my hon. Friend the Member for Wycombe on bringing these important matters to the House’s attention.<br /><a class="anchor noCont" href="https://www.blogger.com/null" name="ordayhd_5"></a><a class="anchor noCont" href="https://www.blogger.com/null" name="141120-0002.htm_ordayhd2"></a><a class="anchor noCont" href="https://www.blogger.com/null" name="14112048000269"></a><br /><h5 align="left">12.30 pm</h5><a class="anchor" href="https://www.blogger.com/null" name="st_o263"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000233"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew48"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000400"></a><b><b>Austin Mitchell</b> (Great Grimsby) (Lab):</b> I welcome this debate and congratulate hon. Friends on securing it, because we have not debated this matter for over 100 years, and it is time we did so. This House and the Government are obsessed with money and the economy, but we never debate the creation of money or credit, and we should, because, when it comes to our present economic situation and the way the banks and the economy are run, that is the elephant in the room. It is time to think not outside the box, but outside the banks; it is time to think about the creation of credit and money.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o106"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para49"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000234"></a>I speak as a renegade social creditor who is still influenced by social credit thinking; I do not pledge total allegiance to Major Douglas, but I am still influenced by him. As has just been pointed out, 93% of credit is created by the banks, and a characteristic of what has happened to the economy since the ’70s is the enormous expansion of that credit. I have here a graph from Positive Money showing that the money created by the banks was £109 billion in 1980. Thanks to the financial reforms and the huge increase in the power of the banks since then, by 2010 that figure had risen to £2,213 billion, whereas the total cash created by the Government—the other 3%—had barely increased at all. Since 2000 we have seen the amount of money created by the banks more than double.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o107"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para50"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000235"></a>That has transformed the economy, because it has financialised everything and made money far more important. It has created debt-fuelled growth followed by collapse. It is being controlled by the banks, which have directed the money into property and financial speculation. Only 8% of the credit created has been lent to new businesses. The Government talk about the march of the makers, but the makers are not marching into the banks, because the banks are turning them away. Even commercial property is more important than makers. That has created a very lop-sided economy, with a weak industrial base that cannot pay the nation’s way in the world because investment has been directed elsewhere, and a very unequal society, which has showered wealth on those at the top, as Piketty shows, and taken it away from those at the bottom.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o108"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para51"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000236"></a>A very undesirable situation is being created. We have built an unstable economy that is very exposed to risk and to bubble economics, thanks to the financialisation process that has gone on since 1979. The state allocates all credit creation to the banks and then has to bail them out and guarantee them, at enormous expense and with the creation of debt for the public, when the bubble bursts and they collapse.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o109"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para52"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000237"></a>Some argue—Major Douglas would have argued this—that credit should therefore be issued only by the state, through the Bank of England. That would probably be a step too far in the present situation, given our present lack of education, but we can and should create the credit issued by the banks. We can and should separate the banks’ utility function—servicing our needs, with cheque books, pay and so on—and their speculative<b> </b>role. The Americans have moved a step further, with the Volcker rule, but it is not quite strong enough. In this country we tend to rely on Chinese walls, which are not strong at all. I think that only a total separation of the banks’ utility and speculative arms will do it, because Chinese walls are infinitely penetrable and are regularly penetrated.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o110"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para53"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000238"></a>We can limit the credit creation by the banks by increasing the reserve ratios, which are comparatively low at the moment—the Government have been trying to edge them up, but not sufficiently—or we could limit their power to create credit to the amount of money deposited with the banks as a salutary control. We could tax them on the hidden benefit they get from creating credit, because they get the signorage on the credit they create. If credit is created by banknotes and cash issued by the Government, the Government get the profit on that—the signorage. The banks just take the signorage on all the credit they issue and stash it away as a kind of hidden benefit, so why not tax that and give some of the profit from printing money to the state?<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o111"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para54"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000239"></a>Martin Wolf, in an interesting article cited by my right hon. Friend the Member for Oldham West and Royton (Mr Meacher), has argued that only central banks should create new money and that it should be regulated by a public credit authority, rather like the Monetary Policy Committee. I think that that would be a solution and a possible approach. Why should we not regulate the issue of credit in that fashion?<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o112"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para55"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000240"></a>That brings us back to the old argument about monetarism: whether credit creation is exogenous or endogenous. The monetarists thought that it was exogenous, so all we have to do is cut the supply of money into the economy in order to bring inflation under control. That was a myth, of course, because we cannot actually control the supply of money; it is endogenous. The economy, like a plant, sucks in the money it needs. But that can be regulated by a public credit authority so that the supply matches the needs of the economy, rather than being excessive, as it has been over the past few years. I think that that kind of credit authority needs to be created to regulate the flow of credit.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o113"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para56"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000241"></a>That brings me to the Government’s economic policy. The Government tell us that they have a long-term economic plan, which of course is total nonsense. Their only long-term economic plan is slash and burn. The only long-term economic planning that has been done is by the Bank of England.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o264"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000242"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew49"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000401"></a><b>Mr MacNeil:</b> To quote Harry S. Truman, the worst thing about economists is that they always say, “On the other hand”. The hon. Gentleman talks about limiting and regulating how much money is to be sucked in by the economy, but who would decide that? The difficulty is that although the economy might be overheating in a certain part of the country, such as the south-east of England, it could be very cool in others, such as the north of Scotland. What might be the geographical effects of limiting the money going into the economic bloodstream if some parts of the plant—I am extending his metaphor—need the nutrients while other parts are getting too much?<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o265"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000243"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew50"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000402"></a><b>Austin Mitchell:</b> The hon. Gentleman often asks tricky questions, but this one is perfectly clear-cut. The credit supply for the peripheral and old industrial parts of the economy, which include Scotland, but also Grimsby, has been totally inadequate, and the banks have been totally reluctant to invest there. I once argued for helicopter money, as Simon Jenkins has proposed, whereby we stimulate the economy by putting money into helicopters and dropping it all over the country so that people will spend it. I would agree to that, provided that the helicopters hover over Grimsby, but I would have them go to Scotland as well, because it certainly deserves its share, as does the north of England. However, I do not want to get involved in a geographical dispute over where credit should be created.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o114"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para57"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000244"></a>The only long-term plan has been that of the Bank of England, which has kept interest rates flat to the floor for six years or so—an economy in that situation is bound to grow—and has supplemented that with quantitative easing. We have created £375 billion of money through quantitative easing. It has been stashed away in the banks, unfortunately, so it has served no great useful purpose. If that supply of money can be created for the purpose of saving the banks and building up their reserve ratios, it can be used for more important purposes—the development of investment and expansion in the economy. This is literally about printing money. Those of us with a glimmering of social credit in our economics have been told for decades, “You can’t print money—it would be terrible. It would be disastrous for the economy to print money because it leads to inflation.” Well, we have printed £375 billion of money, and it has not produced inflation. Inflation is falling.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o266"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000245"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew51"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000403"></a><b>Steve Baker</b><i> rose—</i><br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o267"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000246"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew52"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000404"></a><b>Austin Mitchell:</b> I am sorry—I am mid-diatribe and do not want to be interrupted.<br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o115"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para58"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000247"></a>It has proved possible to print money. The Americans have done it—there has been well over $1 trillion of quantitative easing in the United States. The European Central Bank is now contemplating it, as Mr Draghi casts around for desperate solutions to the stagnation that has hit the eurozone. The Japanese, surprisingly, did it only last week. If all can do it, and if it has been successful here and has not led to inflation, we should be able to use it for more useful and productive economic purposes than shoring up the banks.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o116"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para59"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000248"></a>If we go on creating more money through quantitative easing, we should channel it through a national investment bank into productive investment such as contracts for house building and new town generation. Through massive infrastructure work—although I would not include HS2 in that—we can stimulate the economy, stimulate growth, and achieve useful purposes that we have not been able to achieve. This is a solution to a lot of the problems that have bedevilled the Labour party. How do we get investment without the private finance initiative and the heavy burden that that imposes on health services, schools, and all kinds of activities? Why not, through quantitative easing, create contracts for housing or other infrastructure work that have a pay-off point and produce assets for the state?<br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o117"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para60"></a><a class="anchor" href="https://www.blogger.com/null" name="14112048000249"></a>I mentioned the article in which Martin Wolf advocates the approach of the Monetary Policy Committee. That is how we should approach this. I welcome this debate because it has to be the beginning of a wider debate in which we open our minds to the possibilities of managing credit more effectively for the better building of the strength of the British economy.<br /><br />12.44 pm<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o268"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000002"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew53"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000216"></a><b><b>Zac Goldsmith</b> (Richmond Park) (Con):</b> I want to put on record my gratitude to my hon. Friend the Member for Wycombe (Steve Baker) for having initiated this debate, and to his supporters from various parties. Having heard his speech—or most of it; I apologise for being late—I am even more satisfied that it was right to cast my vote for him to join the Treasury Committee.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o118"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para61"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000003"></a>My hon. Friend has introduced an incredibly important debate. As we have heard, this issue has not been debated here for well over a century. We would not be having it were it not for the fact that we are still in the midst of tumultuous times. We had the banking crash and the corresponding crash in confidence in the banking system and in the wider economy, and now, partly as a consequence, we have the problem of under-lending, particularly to small and medium-sized businesses. This subject could not be more important.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o119"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para62"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000004"></a>The right hon. Member for Oldham West and Royton (Mr Meacher)—I will call him my right hon. Friend because we work together on many issues—pointed out at the beginning of his speech that this issue is not well understood by members of the public. As I think he said later—if not, I will add it—it is also not well understood by Members of Parliament. I would include myself in that. I suspect that most people here would be humble enough to recognise that the banking wizardry we are discussing is such a complex issue that very few people properly understand it.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o269"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000005"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew54"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000217"></a><b>Bob Stewart:</b> I totally associate myself with my hon. Friend’s comments about ignorance and include myself in that. It seems to me that the system is broken. The banks will not lend money because the Government have told them that they have to keep reserves. We do not like quantitative easing because that means that the banks are not lending. There is something very wrong with the system. It is not a case of “if the system isn’t broke, don’t fix it”, but “the system is broke, and someone’s got to fix it”.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o270"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000006"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew55"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000218"></a><b>Zac Goldsmith:</b> My hon. Friend makes a valuable point that I will come to later.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o120"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para63"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000007"></a>If Members of Parliament do not really understand how money is created—I believe that that is the majority position, based on discussions that I have been having—how on earth can we be confident that the reforms that we have brought in over the past few years are going to work in preventing repeated collapses of the sort that we saw before the last election? In my view, we cannot be confident of that. The problem is the impulsive position taken by ignorant Members. I do not intend to be rude; as I said, I include myself in that bracket. For too many people, the impulse has been simply to call for more regulation, as though that is going to magic away these problems. As my hon. Friend the Member for Wycombe said, there are 8,000 pages of guidance in relation to one aspect of banking that he discussed. The problem is not a lack of regulation; it is the fact that the existing regulations miss the goal in so many respects. Banking has become so complex and convoluted that we need an entirely different approach.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o121"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para64"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000008"></a>When we talk to people outside Parliament about banking, the majority have a fairly simple view—the bank takes deposits and then lends, and that is the way it has always been. Of course, there is an element of truth in that, but it is so far removed from where we are today that it is only a very tiny element.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o271"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000009"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew56"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000219"></a><b>Steve Baker:</b> My hon. Friend mentions the idea of straightforward, carry-through lending. When people talk about shadow banking, they are usually talking about asset managers who are lending and are passing funds straight through—similarly with peer-to-peer lenders. I am encouraged by the fact that when people are freely choosing to get involved with lending, they are not using the expansionary process but lending directly. Whereas the banks are seen simultaneously to fail savers and borrowers, things like peer-to-peer lending are simultaneously serving them both.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o272"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000010"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew57"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000220"></a><b>Zac Goldsmith:</b> That is a really important point. There is a move towards such lending, but unfortunately it is only a fringe move that we see in the credit unions, for example. It is much closer to what original banking—pure banking or traditional banking—might have looked like. We even see it in some of the new start-ups such as Metro bank; I hesitate to call it a start-up because it is appearing on every high street. Those banks have much more conservative policies than the household-name banks that we have been discussing.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o122"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para65"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000011"></a>Most people understand the concept of fractional reserve banking even if they do not know the term—it is the idea that banks lend more than they can back up with the reserves they hold.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o273"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000012"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew58"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000221"></a><b><b>Guy Opperman</b> (Hexham) (Con):</b> My hon. Friend mentioned Metro, whose founder is setting up a bank—in which I should declare an interest—called Atom in the north-east. It is one of some 22 challenger banks of which Metro was the first. I missed the opening of the debate, so I have not heard everything that has been said, but I do not accept that it is all doom and gloom in banking. Does he agree that these new developments are proof that the banking system is changing and the old big banks are being replaced with the increased competition that we all need?<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o274"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000013"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew59"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000222"></a><b>Zac Goldsmith:</b> I certainly agree with the sentiment expressed. I am excited by the challengers, but I do not believe that it is enough. Competition has to be good because it minimises risk. I know that my hon. Friend the Economic Secretary has dwelt on and looked at this issue in great detail.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o123"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para66"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000014"></a>Even fractional reserve banking is only the start of the story. I will not repeat in detail what we have already heard, but banks themselves create money. They do so by making advances, and with every advance they make a deposit. That is very poorly understood by people outside and inside the House. It has conferred extraordinary power on the banks. Necessarily, naturally and understandably, banks will use and have used that power in their own interests. It has also created extraordinary risk and, unfortunately, because of the size and interconnectedness of the banks, the risk is on us. That is why I am so excited by the challengers that my hon. Friend has just described. As I have said, that is happening on the fringe: it is right on the edge. It is extraordinary to imagine that at the height of the collapse the banks held just £1.25 for every £100 they had lent out. We are in a very precarious situation. <br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o124"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para67"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000015"></a>When I was much younger, I listened to a discussion, most of which I did not understand, between my father and people who were asking for his advice. He was a man with a pretty good track record on anticipating turbulence in the world economy. He was asked when the next crash would happen, and he said, “The last person you should ask is an economist or a business man. You need to ask a psychiatrist, because so much of it involves confidence.” The point was proven just a few years ago.<br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o125"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para68"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000016"></a>The banking system and the wider economy have become extraordinarily unhinged or detached from reality. I would like to elaborate on the extraordinary situation in which it is possible to imagine economic growth even as the last of the world’s great ecosystems or the last of the great forests are coming down. The economy is no longer linked to the reality of the natural world from which all goods originally derive. That is probably a debate for another time, however, so I will not dwell on it.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o275"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000017"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew60"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000223"></a><b>Mr MacNeil:</b> The hon. Gentleman is making a good point that we should remember. It was brought home to me by Icelandic publisher Bjorn Jonasson, who pointed out that we are not in a situation where volcanoes have blown up or there have been huge national disasters, famines or catastrophes brought on by war; as a couple of the hon. Gentleman’s colleagues have said, this is about a system failure within the rules, and it is worth keeping that in mind. Although there is much gloom in relation to the banking system, in many ways that should at the same time give us some hope.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o276"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000018"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew61"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000224"></a><b>Zac Goldsmith:</b> The hon. Gentleman is right, but a growing number of commentators and voices are anticipating a much larger crash than anything we have seen in the past few years. I will not add to or detract from the credence of such statements, but it is possible to imagine how such a collapse might happen, certainly in the ecological system. We are talking about the banking system, but the two systems are not entirely separate.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o126"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para69"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000019"></a>We had a wake-up call before the election just a few years ago. My concern is that we have not actually woken up. It seems to me that we have not introduced any significant or meaningful reforms that go to the heart of the problems we are discussing. We have been tinkering on the edges. I do not believe that Parliament has been as closely involved in the process as it should be, partly because of the ignorance that I described at the beginning of my speech.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o127"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para70"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000020"></a>I want to put on the record my support for the establishment of a meaningful monetary commission or some equivalent in which we can examine the pros and cons of shifting from a fractional reserve banking system to something closer to a full reserve banking system, as some hon. Members have said. We need to understand the pros and cons of such a move, how possible it is, and who wins and who loses. I do not think that many people fully know the answers.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o128"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para71"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000021"></a>We need to look at quantitative easing. I think that hon. Members on both sides of the House have accepted that it is not objective. Some believe that it is good and others believe that it is bad, but no one believes that it is objective. If the majority view is that quantitative easing is necessary, we need to ask this question: why not inject those funds into the real economy—into housing and energy projects of the kind that Opposition Members have spoken about—rather than using the mechanism in a way that clearly benefits only very few people within the world of financial and banking wizardry that we are discussing?<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o129"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para72"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000022"></a>The issues need to be explored. The time has come to establish a monetary commission and for Parliament to become much more engaged. This debate is a very small step in that direction, and I am very grateful to its sponsors. I wish more Members were in the Chamber—I had intended to listen, not to speak—but, unfortunately, there have not been many speakers. This is a beginning, however, and I hope that we will have many more such debates.<br /><a class="anchor noCont" href="https://www.blogger.com/null" name="ordayhd_7"></a><a class="anchor noCont" href="https://www.blogger.com/null" name="141120-0002.htm_ordayhd4"></a><a class="anchor noCont" href="https://www.blogger.com/null" name="14112050000207"></a><br /><h5 align="left">12.55 pm</h5><a class="anchor" href="https://www.blogger.com/null" name="st_o277"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000023"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew62"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000225"></a><b><b>Mark Durkan</b> (Foyle) (SDLP):</b> I rise to endorse the very significant points made by hon. Members. In particular, I pay tribute to the hon. Member for Wycombe (Steve Baker) for securing the debate and for opening it so strongly. From hearing him speak in Public Bill Committees on banking reform and related questions, I know that he is dubious about our having almost feng shui arguments on the regulatory furniture when there are fundamental questions to be asked about the very foundations of the system. He amplified that point in his speech.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o130"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para73"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000024"></a>My right hon. Friend the Member for Oldham West and Royton (Mr Meacher) made the point that the whole approach to quantitative easing—several Members have questioned it at a number of levels—proves that the underlying logic of sovereign money creation is feasible and workable. It is strange that some of the people who would dispute or refute the case for sovereign money creation sometimes defend quantitative easing in its existing form and with its current features.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o131"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para74"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000025"></a>In many ways, quantitative easing has shown that if we are to use the facility of the state—in this situation, the state’s main tool is the Bank of England—to alter or prime the money supply in a particular way, we could choose a much better way of doing so than through quantitative easing. It is meant to have increased the money supply, but where have people felt that in terms of business credit, wages or the stimulus that consumer power can provide?<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o132"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para75"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000026"></a>When we look back at the financial crash and its aftermath, we can see evidence—not just in the UK, but in Ireland and elsewhere—showing that much of what we were told about the worth or the wealth of various sectors in the economy up until the crash has turned out to be vacuous, while the poverty lying in its trail has been vicious. The worth or the wealth was not real, but the poverty is real. People in organisations such as Positive Money in the UK or Sensible Money in Ireland are therefore saying, rightly, that politics—those of us charged with overseeing public policy as it affects thev economy—need to have more of a basic look at how we treat the banking system and at the very nature of money creation.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o133"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para76"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000027"></a>As someone who grew up in Northern Ireland, I am very used to the idea of having different banknotes—banks issuing their own money—but we do not think much about that, because we think that all that happens in the Bank of England or under its licence. As a member of the Financial Services Public Bill Committee and the Financial Services (Banking Reform) Public Bill Committee, it seems to me that although it has been recognised that some regulatory powers should go back to the Bank of England, the arrangements for regulation and the Bank of England’s role are still very cluttered.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o134"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para77"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000028"></a>In fact, in trying to correct the regulatory deficiencies that existed before the crash, there is a risk that we have perhaps created too many conflicting and confusing roles for the Bank of England. Given the various personages, different roles and job descriptions that attach to some of those committees, it seems to me that there is potential for clutter in the Treasury. The common denominator and reference point in the range of different committees and bodies and the things they do, is the Treasury. When the Treasury exercises its powers, influences judgments, and informs the criteria and considerations of those different committees under the Bank of England, there is not enough scrutiny or back play through Parliament.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o135"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para78"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000029"></a>I endorse the points made by other hon. Members about ensuring more accountability, whether through more formal reference to the Treasury Committee or some other hybrid, as suggested in an intervention on the right hon. Member for Oldham West and Royton. There should be more parliamentary insight—and definitely parliamentary oversight—on these matters. We cannot suddenly be shocked that all the confidence in various regulatory systems turned out to have been badly placed. That was our experience the last time, when people who now criticise the previous Government for not having had enough regulation were saying that there was too much regulation and calling for more deregulation.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o136"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para79"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000030"></a>If we in this Parliament have produced a new regulatory order, we must be prepared to face and follow through the questions that arise. It is not good enough to ensure that the issue returns to Parliament only the next time there is a crisis, when we will have to legislate again. We should do more to be on our watch. The hon. Member for Wycombe and other hon. Members who secured this debate have done us a service. We want more of a parliamentary watch window on these issues.<br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o137"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para80"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000031"></a>There is a necessary role for banks in the creation of money and quantitative easing, but we must entrust them with the right role and with the appropriate controls and disciplines. That is fundamental. It is not good or strong enough that we leave it to the whims of the banks and their lending—supposedly reinforced and stimulated by quantitative easing—to profile the performance of the economy.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o138"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para81"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000032"></a>If quantitative easing works on the basis of the Bank of England, through the asset purchase facility, essentially using money that it creates under quantitative easing to buy gilts from a pension fund whose bank account is with RBS—which in essence is owned by the Bank of England—then RBS’s bank account with the Bank of England goes up by the value of that gilt purchase. Simultaneously, the bank account of the pension fund goes up by that amount, and we are told that the UK money supply has increased. Yes, in theory the pension fund can purchase other assets—is that what is happening?—but while 1% of the big money holders and players appear to have been advantaged through quantitative easing, where is the trickledown to the rest of the economy? It is not there.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o139"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para82"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000033"></a>The sovereign money creation model seems to be primed much more specifically on a view of the total economy and providing a broad, stable and more balanced approach to stimulus and economic performance. We have had the slowest recovery coming out of a recession with quantitative easing. I do not say that to get some voice-activated reaction from the Government about how good the recovery and performance is, but in broader historical terms it is the slowest recovery, which also leaves questions about quantitative easing.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o140"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para83"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000034"></a>We heard from the Prime Minister about red warning lights on the dashboard of the world economy, and I wonder whether he would ever say that, to his mind, those warning lights include the degree to which global banks are now playing heavily in derivatives again, and there needs to be more action. That raises issues not just of regulation at national level, but at international level.<br /><a class="anchor noCont" href="https://www.blogger.com/null" name="ordayhd_8"></a><a class="anchor noCont" href="https://www.blogger.com/null" name="141120-0002.htm_ordayhd5"></a><a class="anchor noCont" href="https://www.blogger.com/null" name="14112050000208"></a><br /><h5 align="left">1.5 pm</h5><a class="anchor" href="https://www.blogger.com/null" name="st_o278"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000035"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew63"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000226"></a><b><b>Catherine McKinnell</b> (Newcastle upon Tyne North) (Lab):</b> I congratulate the hon. Member for Wycombe (Steve Baker) on his thoughtful and thorough opening speech, as well as my right hon. Friend the Member for Oldham West and Royton (Mr Meacher) on his remarks. In their absence I also congratulate the hon. Members for Brighton, Pavilion (Caroline Lucas) and for Clacton (Douglas Carswell) on securing today’s important debate.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o141"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para84"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000036"></a>This debate follows a significant campaign by Positive Money, which has raised important issues about how we ensure financial stability, and how we as parliamentarians and members of the public can gain a greater understanding of the way our economy works, in particular how money is supplied not just in this country but around the world.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o142"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para85"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000037"></a>Some important questions have been highlighted in the debate, although not all have been answered. There are questions about how money is created, how money or credit is used by banks and others, how our financial system can be more transparent and accountable, and particularly how it can benefit the country as a whole. That latter point is something that Labour Members have been acutely focused on. How do we re-work our economy, whether in banking or in relation to jobs and wages, so that it works for the country as a whole?<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o143"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para86"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000038"></a>It is worth reflecting on our current system and what it means for money creation. As the hon. Member for Wycombe set out eloquently in his opening speech, we know that currency is created in the conventional sense of being printed by the Bank of England, but commercial banks can create money through account holders depositing money in their accounts, or by issuing loans to borrowers. That obviously increases the amount of money available to borrowers and within the wider economy. As the Bank of England made clear in an article accompanying its first quarterly bulletin in 2014:<br /><a class="anchor noCont" href="https://www.blogger.com/null" name="141120-0002.htm_brev6"></a><a class="anchor noCont" href="https://www.blogger.com/null" name="14112050000194"></a><i><br /></i><br /><div class="tabletext"><i>“When a bank makes a loan to one of its customers it simply credits the customer’s account with a higher deposit balance. At that instant, new money is created.”</i><br /></div><a class="anchor" href="https://www.blogger.com/null" name="stpa_o144"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para87"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000039"></a>Bank loans and deposits are essentially IOUs from banks, and therefore a form of money creation.<br /><a class="anchor-column noCont" href="https://www.blogger.com/null" name="column_462"></a><a class="anchor" href="https://www.blogger.com/null" name="stpa_o145"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para88"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000040"></a>Commercial banks do not have unlimited ability to create money, and monetary policy, financial stability and regulation all influence the amount of money they can create. In that sense, banks are regulated by the Prudential Regulation Authority, part of the Bank of England, and the Financial Conduct Authority. Those regulators, some of which are—rightly—independent, are the stewards of “safety and soundness” in financial institutions, especially regarding banks’ money-creating practices.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o146"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para89"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000041"></a>Banks are compelled to manage the liabilities on their balance sheets to ensure that they have capital and longer-term liabilities precisely to mitigate risks and prevent them from effectively having a licence to print money. Banks must adhere to a leverage ratio—the limit on their balance sheets, compared with the actual equity or capital they hold—and we strongly support that. Limiting a bank’s balance sheet limits the amount of money it can create through lending or deposits. There are a series of checks and balances in place when it comes to creating money, some of which the Opposition strongly supported when we debated legislative changes in recent years. It remains our view that the central issue, the instability of money supply within the banking system, is less to do with the powers banks hold and how they create money than with how they conduct themselves and whether they act in the public interest in other ways too.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o147"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para90"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000042"></a>We believe the issues relate to the incentives in place for banks to ensure that loans and debts are repaid, and granted only when there is a strong likelihood of repayment. When the money supply increases rapidly with no certainty of repayment, that is when real risks emerge in the economy. Those issues were debated at great length when the Financial Services (Banking Reform) Act 2013 made its way through Parliament, following recommendations from Sir John Vickers’ Independent Commission on Banking and the Parliamentary Commission on Banking Standards, which considered professional standards and culture in the industry. The 2013 Act created the Prudential Regulation Authority and gives regulators the power to split up banks to safeguard their future, to name just two examples of changes that were made. However, we feel that it did not go far enough.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o148"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para91"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000043"></a>The Opposition’s concern is that the Government’s actions to date in this area have fallen short of the mark. They have failed to boost sufficient competition in the banking industry to raise those standards and to create public confidence in the sector. As hon. Members with an interest in this area know, we tabled a number of amendments to try to strengthen the Bill, and to prevent banks from overreaching themselves and taking greater risks, by ensuring that the leverage ratio is effective. That goes to the heart of many of the issues we are debating today. The Government rejected our proposals to impose on all those working in the banking industry a duty of care to customers. That would help to reform banking so that it works in the interests of customers and the economy, and not solely those of the banks. Those are the areas on which we still feel that reform is needed in the sector.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o149"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para92"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000044"></a>It is clear from this debate that there is a whole range of issues to consider, but our focus is that the banks need to be tightly and correctly regulated to ensure that they work for the whole economy, including individuals and small and large businesses. That is the key issue that we face at present. Only when the banks operate in that way and work in the interests of the whole economy will we find our way out of the cost of living crisis that so many people are facing.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o150"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para93"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000045"></a>I thank hon. Members for securing this very important debate and for the very interesting contributions that have been made from all sides of the House. I am pretty certain that this is not the end of the conversation. The debate will go on.<br /><a class="anchor noCont" href="https://www.blogger.com/null" name="ordayhd_9"></a><a class="anchor noCont" href="https://www.blogger.com/null" name="141120-0002.htm_ordayhd6"></a><a class="anchor noCont" href="https://www.blogger.com/null" name="14112050000209"></a><br /><h5 align="left">1.12 pm</h5><a class="anchor" href="https://www.blogger.com/null" name="st_o279"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000046"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spmin0"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000227"></a><b>The Economic Secretary to the Treasury (Andrea Leadsom):</b> I too congratulate hon. Members on securing this fascinating debate. It is long overdue and has allowed us to consider not just what more we can do to improve what we have but whether we should be throwing it away and starting again. I genuinely welcome the debate and hope that many more will follow. In particular, I pay tribute to my hon. Friend the Member for Wycombe (Steve Baker), who now sits on the Treasury Committee on which I had the great honour to serve for four years. I am sure that his challenge to orthodoxy will have been extremely welcomed by the Committee and by many others. I wish him good luck on that.<br />&nbsp; <br /><a class="anchor" href="https://www.blogger.com/null" name="st_o280"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000047"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew64"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000228"></a><b>Steve Baker:</b> May I just say how much I am enjoying my hon. Friend’s place on the Committee? I congratulate her on her promotion once again.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o281"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000048"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew65"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000229"></a><b>Andrea Leadsom:</b> I am grateful to my hon. Friend.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o151"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para94"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000049"></a>My right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley) gave a fantastic explanation that I would commend to anybody who wants to understand how money is created. He might consider delivering it under the financial education curriculum in schools. It was very enlightening, not least because it highlighted the appalling failure of regulation in the run-up to the financial crisis that is still reverberating in our economy today. All hon. Members made interesting points on what we can do better and whether we should be thinking again. I pay tribute to the right hon. Member for Oldham West and Royton (Mr Meacher) for his good explanation of the Positive Money agenda, which is certainly an idea worthy of thought and I will come on to it.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o152"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para95"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000050"></a>Money creation is an important and complex aspect of our economy that I agree is often misunderstood. I would therefore like quickly to set out how the system works. The money held by households and companies takes two forms: currency, which is banknotes and coins, and bank deposits. The vast majority, as my hon. Friend pointed out, is in the form of bank deposits. He is absolutely right to say that bank deposits are primarily created by commercial banks themselves each time they make a loan. Whenever a bank makes a loan, it credits the borrower’s bank account with a new deposit and that creates “new money”. However, there are limits to how much new money is created at any point in time. When a bank makes a loan, it does so in the expectation that the loan will be repaid in the future—households repay their mortgages out of their salaries; businesses repay their loans out of income from their investments. <br /><br /><a class="anchor-column noCont" href="https://www.blogger.com/null" name="column_464"></a>In other words, banks will not create new money unless they think that new value will also in due course be created, enabling that loan to be paid back.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o153"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para96"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000051"></a>Ultimately, money creation depends on the policies of the Bank of England. Changes to the bank rate affect market interest rates and, in turn, the saving and borrowing decisions of households and businesses. Prudential regulation is used if excessive risk-taking or asset price bubbles are creating excessive lending. Those checks and balances are an integral part of the system.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o154"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para97"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000052"></a>I agree fully that the regulatory system was totally unfit in the run-up to the financial crisis. We saw risky behaviour, excessive lending and a general lack of restraint on all sides. The key problem was that the buck did not stop anywhere. When there were problems in the banking system, regulators looked at each other for who was responsible. We all know that the outcome was the financial crisis of 2008. I, too, see the financial crisis as a prime example of why we need not just change but a better banking culture: a culture where people do not spend their time thinking about how to get around the rules; a culture where there is no tension between what is good for the firm and what is good for the customer; and a culture where infringements of the rules are properly and seriously dealt with.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o155"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para98"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000053"></a>I will touch on what we are doing to change the regulations and the culture, but first I will set out why we do not believe that the right solution is the wholesale replacement of the current system by something else, such as a sovereign monetary system. Under a sovereign monetary system, it would be the state, not banks, that creates new money. The central bank, via a committee, would decide how much money is created and this money would mostly be transferred to the Government. Lending would come from the pool of customers’ investment account deposits held by commercial banks.<br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o156"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para99"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000054"></a>Such a system would raise a number of very important questions. How would that committee assess how much money should be created to meet the inflation target and support the economy? If the central bank had the power to finance the Government’s policies, what would the implications be for the credibility of the fiscal framework and the Government’s ability to borrow from the market if they needed to? What would be the impact on the availability of credit for businesses and households? Would not credit become pro-cyclical? Would we not incentivise financing households over businesses, because for businesses, banks would presumably expect the state to step in? Would we not be encouraging the emergence of an unregulated set of new shadow banks? Would not the introduction of a totally new system, untested across modern advanced economies, create unnecessary risk at a time when people need stability?<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o282"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000055"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew66"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000230"></a><b>Steve Baker:</b> I do not actually support Positive Money’s proposals, although I am glad to work with it because I support its diagnosis of the problem. Of course, this argument could have been advanced in 1844 and it was not. I have not proposed throwing away the system and doing something radically new; I have proposed getting rid of all the obstacles to the free market creating alternative currencies.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o283"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000056"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew67"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000231"></a><b>Andrea Leadsom:</b> I am grateful to my hon. Friend for pointing that out. I must confess that before the debate I was puzzled that such an intelligent and extremely sensible person should be making the case for a sovereign monetary system, which I would consider to be an extraordinarily state-interventionist proposal. I am glad to hear that is not the case. In addition, of course, bearing in mind our current set of regulators, presumably we would then be looking at a committee of middle-aged, white men deciding what the economy needs, which would also be of significant concern to me.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o284"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000057"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew68"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000232"></a><b>Mr Meacher:</b> Before the Minister leaves the question of a sovereign monetary system, which she obviously totally opposes and to which she raised several objections that I cannot answer in an intervention, does she not believe that the system of bank money creation is highly pro-cyclical and has enormously benefited property and financial sectors to the disadvantage of the vast range of industries outside the financial sector?<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o285"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000058"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew69"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000233"></a><b>Andrea Leadsom:</b> As I said, I sincerely congratulate the right hon. Gentleman on raising this matter; it is certainly worthy of discussion, and I look forward to him responding to some of my arguments. I agree that where we were in the run-up to the financial crisis was entirely inappropriate, and I will come to some of the steps we have taken to improve—not throw away the baby with the bathwater—what we have now, rather than throwing it away and starting again.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o157"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para100"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000059"></a>I know that some of my hon. Friends and Opposition Members have a particular concern about quantitative easing—I have made it clear that I do too—specifically about how we might unwind it. However, they must agree that at least it can be unwound, unlike the proposal for “helicopter money”, which would seem to be a giant step beyond QE—a step where money would be created by the state with no obvious way to rein it back if necessary.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o158"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para101"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000060"></a>If the tap in my bathroom breaks, rather than wrenching the sink off the wall, I would prefer to fix the tap. As Martin Wolf said last week,<i> “nobody can say with confidence”</i> how a monetary system should be structured and what laws and regulations it should have. Given that and the economic tumult across the world, we should be devoting our energies to fixing the system we have—mending the problems but keeping what works. For that reason, the Government have taken significant steps to improve the banking sector, making sure it fulfils its core purpose of keeping the wheels of the economy well oiled.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o160"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para103"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000062"></a>We are creating a better, safer financial system, with the Financial Policy Committee, created in this Parliament, focused on macro-prudential analysis and action. As the hon. Member for Newcastle upon Tyne North (Catherine McKinnell) pointed out, the FPC has been given counter-cyclical tools to require more capital to be held and to increase the leverage ratio and the counter-cyclical capital buffers when the economy is over-exuberant in order to push back against it—as the previous Governor of the Bank of England said, to remove the punch bowl while the party is still in full flow. That is incredibly important. We are also reducing dependence on debt. Since the financial crisis, the UK banking system has been forced significantly to strengthen its capital and liquidity position, and it is continuing to do so.<br /><br /><a class="anchor-column noCont" href="https://www.blogger.com/null" name="column_466"></a><a class="anchor" href="https://www.blogger.com/null" name="stpa_o161"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para104"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000063"></a>I must stress, however, that regulation alone will never be enough, which is why the Government are promoting choice, competition and diversity. I am delighted that 25 new banks are talking to the Prudential Regulatory Authority about getting a bank licence. We are also making strong efforts to promote the mutual sector; to enhance the capacity of credit unions to serve the real economy better; to enable booster funding for small businesses; to help families; and to improve customer service. We have put in place schemes to help the transmission of money from banks to customers, including the funding for lending scheme, which has lowered the price and increased the availability of credit for small and medium-sized businesses. As I think the hon. Member for Newcastle upon Tyne North said, we have also created the British business bank, which is helping finance markets work better for small firms, and are investing much resource and effort to build that up and help businesses in our economy.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o162"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para105"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000064"></a>We also have a programme of measures to increase competition in the SME lending market, including flagship proposals to open up access to SME credit information, which will help challengers to get in on the act, and to have banks pass on declined applications for finance to challenger banks. In addition, we now have an appeals process whereby small businesses turned down for funding can get a second chance, which has secured an additional £42 million of lending since its launch. These are all measures to help small businesses access finance. Then, to mitigate the problem of house price bubbles, we are putting in place supply-side reforms to promote home building and home owning, as well as measures enabling the PRA to limit the amount of lending that households can take on.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o163"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para106"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000065"></a>I agree with Members on both sides of the House, however, that we should not be content with the system as it stands. We must seek to improve it and make it function better. In Mark Carney, we have an excellent central banker who has the experience and knowledge to put the right reforms in place and see them through. As he says:<br /><a class="anchor noCont" href="https://www.blogger.com/null" name="141120-0002.htm_brev8"></a><a class="anchor noCont" href="https://www.blogger.com/null" name="14112050000196"></a><i>“Reform should stop only when industry and society are content, and finance justifiably proud.”</i><br /><br />In the medium to long term, we need to create a culture where research and analysis do not shy away from going against the orthodoxy. As hon. Members across the House have said, we need to consider alternatives, and we should be having that discussion; it is healthy to do so, because that is how to make progress. For that reason, the call from Andy Haldane, the Deputy Governor of the Bank of England, for a broader look at new and existing monetary ideas is exactly right.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o286"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000067"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew70"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000234"></a><b>Mr Meacher:</b> I am pleased the Minister thinks that alternative ways of improving the monetary system should be explored. Will she support the idea of a setting up a commission to examine the alternatives, as recommended by the hon. Member for Richmond Park (Zac Goldsmith), as well as by me—so there is some cross-part support on this? Is that not an idea whose time has come?<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="st_o287"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000068"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew71"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000235"></a><b>Andrea Leadsom:</b> I think that an organisation such as the Treasury Committee, of which my hon. Friend the Member for Wycombe is member, would be entirely the right place to have such a discussion, and of course we also had the Vickers commission, which looked at what went wrong and what measures could be put in place, and the Parliamentary Commission on Banking Standards, which specifically addressed the issue of incentives and motivations in banking. I would not normally advocate the establishment of great new commissions; we already have the bodies to look further at different orthodoxies, and as Andy Haldane has said, the Bank itself will be looking at, and encouraging, the exploration of alternative views.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o165"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para108"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000069"></a>Of course, we also need to continue embracing innovation, both in the “software” of how payments are made and in the “hardware” of new currencies, such as crypto-currencies and digital currencies—both could open up competition and give customers greater choice and access to funding—but we must do so with caution. In November, we published a call for information inviting views and evidence on the benefits and risks of digital currencies so that digital currency businesses can continue to set up in the UK and people can expect to use them safely.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o166"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para109"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000070"></a>I am the last person who could be described as statist, but I accept that we must always be ruthless in our determination to regulate new ideas that come to the fore, because as sure as night follows day, as new ideas come in, through shadow banking, new lending ideas and so on, some people will seek to manipulate new schemes and currencies for fraudulent purposes. I am absolutely alive to that fact. It is important, therefore, that the Government carry out the necessary research.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o167"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para110"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000071"></a>The Government believe that the current system, modified and improved with far greater competition, can service the economy best. However, reform is vital. Again as Andy Haldane puts it:<br /><a class="anchor noCont" href="https://www.blogger.com/null" name="141120-0002.htm_brev9"></a><a class="anchor noCont" href="https://www.blogger.com/null" name="14112050000197"></a><br /><div class="tabletext"><i>“Historically, flexing policy frameworks has often been taken as a sign of regime failure. Quite the opposite ought to be the case”.</i></div><a class="anchor" href="https://www.blogger.com/null" name="stpa_o168"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para111"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000072"></a>We need banks to lend—to young families wanting to buy houses and repay out of future labour income rather than relying on the bank of mum and dad, and to businesses wanting to seize opportunities, gain new markets and create jobs and growth. We have an existing system that offers a forward-looking and dynamic framework in which tomorrow’s opportunities are not wholly reliant on yesterday’s savings and which builds on banks’ expertise in assessing risk and making the lending decisions we badly need. During my 25 years at the heart of the industry, I saw the sector at its best, but sometimes sadly also at its worst. We are trying to remedy the worst, but let us also keep the best.<br /><a class="anchor noCont" href="https://www.blogger.com/null" name="ordayhd_10"></a><a class="anchor noCont" href="https://www.blogger.com/null" name="141120-0002.htm_ordayhd7"></a><a class="anchor noCont" href="https://www.blogger.com/null" name="14112050000210"></a><br /><h5 align="left">1.29 pm</h5><a class="anchor" href="https://www.blogger.com/null" name="st_o288"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000073"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_spnew72"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000236"></a><b>Steve Baker:</b> This debate has been a joy at times, and I am extremely grateful to right hon. and hon. Members who helped me to secure it. The right hon. Member for Oldham West and Royton (Mr Meacher) made clear his support for sovereign money. One of the great advantages of such a system is that it would make explicit what is currently hidden—that it is the state that is trying to steer the monetary system—and if such a system failed, it would at least be clear that it was a centrally planned monetary order that had failed.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o169"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para112"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000074"></a>The hon. Member for Clacton (Douglas Carswell) talked about the ownership of deposits, and I was glad to support his private Member’s Bill. I am reminded of the intervention from the hon. Member for Hackney North and Stoke Newington (Ms Abbott), who talked about deposit insurance. One of the problems, as seen in Cyprus in the context of depositor “bail-ins”, is that deposits are akin to a share in a risky investment vehicle, so a little more clarity about what a deposit means and what risks depositors take could go a long way.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o170"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para113"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000075"></a>My right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley) highlighted one of the greatest controversies among free marketeers—whether or not fractional reserve deposit taking is legitimate.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o171"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para114"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000076"></a>The hon. Member for Great Grimsby (Austin Mitchell) mentioned Major Douglas, which he will have seen put a smile on my face. Major Douglas was dismissed as a crank, even by Keynes who dismissed him in his writing as a “private”. This highlights the fact that the possible range of debate is enormous.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o172"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para115"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000077"></a>I would like to leave my final words with Richard Cobden, the Member representing Stockport back in the time when this was also a big issue. He said:<br /><a class="anchor noCont" href="https://www.blogger.com/null" name="141120-0002.htm_brev10"></a><a class="anchor noCont" href="https://www.blogger.com/null" name="14112050000198"></a><br /><div class="tabletext">“I hold all idea of regulating the currency to be an absurdity; the very terms of regulating the currency…I look upon to be an absurdity”.</div><a class="anchor" href="https://www.blogger.com/null" name="stpa_o173"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para116"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000078"></a>The currency, for him,<br /><a class="anchor noCont" href="https://www.blogger.com/null" name="141120-0002.htm_brev11"></a><a class="anchor noCont" href="https://www.blogger.com/null" name="14112050000199"></a><br /><div class="tabletext">“should be regulated by the trade and commerce of the world.”</div><a class="anchor" href="https://www.blogger.com/null" name="stpa_o174"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para117"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000079"></a>I wholeheartedly agree.<br /><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o175"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para118"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000080"></a><i>Question put and agreed to.</i><br /><a class="anchor" href="https://www.blogger.com/null" name="stpa_o176"></a><a class="anchor" href="https://www.blogger.com/null" name="141120-0002.htm_para119"></a><a class="anchor" href="https://www.blogger.com/null" name="14112050000081"></a><i>Resolved,</i><br /><a class="anchor noCont" href="https://www.blogger.com/null" name="141120-0002.htm_brev12"></a><a class="anchor noCont" href="https://www.blogger.com/null" name="14112050000200"></a><br /><div class="tabletext">That this House has considered money creation and society.</div>Simon Thorpehttps://plus.google.com/111728031186593065772noreply@blogger.com0